Kelvin and Kesha are working with an architect to design their own home, and to do so, they must make certain assumptions. They plan to have children, so their floorplan includes two extra bedrooms. A two-car garage is also a priority, although they have only one car now. And a finished apartment above that garage is part of the plan, too, to accommodate the possibility that at least one set of parents will move in with them as they advance in age.
Making educated, well-informed assumptions — about having children, adding another car and having parents eventually moving into the household — is critical to designing a home, whether or not those assumptions ultimately prove to be accurate.
The same holds true when designing a financial “house.” As much we’ve heard the old bromide about the pitfalls of assuming things in life, any well-thought-out financial plan must necessarily incorporate certain assumptions, even if those assumptions may need to be revisited and revised as circumstances change.
In the context of financial planning, making assumptions “is the nature of the beast,” says Richard Colarossi, CFP®, of Colarossi & Williams Financial Advisory Group in Islandia, NY. “You can’t move forward without them. You just have to be sure you understand the basis of the assumption you’re making, that you have a rationale for making a particular assumption, and that you get as close to reality as possible with that assumption.”
Also be ready to adjust on the fly “because there are so many variables that can change the assumptions you make,” he says. “I recommend reviewing [financial plan] assumptions at least annually, so if things have changed, you can adjust accordingly.”
Here’s a look at five key assumptions that factor into the financial planning process and how each fits in the context of a broader financial blueprint.
As much as people may hesitate to make assumptions because of the risk they’ll turn out to be off the mark, it’s next to impossible to build a solid financial plan — or a home, for that matter — without making these and other important assumptions. For a financial plan to remain viable over the long term, the assumptions built into it must be relevant, well-supported and appropriately applied. They also must be revisited regularly and adjusted as needed. That’s where a financial professional can help. To find a CFP® professional in your area, visit the Financial Planning Association’s searchable database at www.PlannerSearch.org.
This column is provided by the Financial Planning Association® (FPA®) of Northeastern New York, the principal professional organization for Certified Financial PlannerTM (CFP®) professionals. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. Please credit FPA of Northeastern New York if you use this column in whole or in part.
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