Are You Making the Right Assumptions About Your Money?

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.
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