Recently, I explained to you what financial planning is. Just like pastoring is a whole lot more than just preaching, financial planning is a whole lot more than just investments. If you haven’t read that article, I would recommend reading it here before continuing on. 

I gave an overview of the different areas of financial planning in that article and now today we will do a deep dive and look at some examples of how that plays out for pastors and the strategies that we use that are unique to people in your position. Let’s start with the clergy housing allowance. That’s an easy one, right? Just maximize it and save on taxes? Not always. Let me show you how a financial planner approaches these things.

Housing Allowance

Sometimes maximizing your housing allowance can actually cost you money. Take, for example, the child tax credit. A portion of the child tax credit is refundable, meaning the government gives you the money even if you don’t owe any taxes. However, the refundable portion is limited by your taxable income. Claiming a lower housing allowance increases your taxable income and your refundable credit. In this manner, you can actually end up ahead by lowering your housing allowance. (This doesn’t apply under special rules for 2021 and President Biden would like to make changes to this, so stay tuned.)

Your tax preparer isn’t going to tell you this, though. Their job is to report your numbers accurately, not help you strategize and plan for the future. That’s what a financial planner does. A good planner understands the interplay between the child tax credit and the housing allowance and will help you calculate a housing allowance amount that allows you to maximize the benefits of both. 

Charitable Giving

One thing I know about pastors is that you are incredibly generous. Not just because you’re laying down your life and the potential for a more lucrative career for the church, but you tithe. You give to missionaries. You support children in Rwanda. You help finance church plants. Those are all things that can be tax-deductible if you itemize your deductions. Unfortunately, hardly anyone itemizes their deductions now that the standard deduction is so high. When you claim the standard deduction, you don’t get a tax benefit for charitable giving. While your treasure in heaven is increasing, your tax bill is staying the same. 

There are strategies for getting a tax benefit for your current level of charitable giving, even if you usually claim the standard deduction. You can utilize a bunching strategy and donor-advised fund. These things get a little complex, but a financial planner can walk you through it as if they do it every day. Because, well, they do.

Retirement

What about retirement? Thinking about retirement is one of the most common things that inspires people to look for professional financial help. What does a financial planner do that an online retirement savings calculator and an account-rebalancing robo-advisor can’t do? Strategize. Apply the tax law to you personally. Help you understand your trade-offs and weigh them before making a decision. 

Housing Allowance in Retirement

The generic advice is to roll your 403(b) account into an IRA when you retire. However, if you read this blog, you know that leaving your money in your 403(b) makes it eligible for the housing allowance in retirement. But should you leave all your money in your 403(b) or move some of it out? That can only be determined by a financial planner addressing your unique situation, not this blog. 

You see, it might be best to move some of the money from your 403(b) into an IRA. You can only claim a housing allowance as long as you, the pastor, are alive. Your spouse can’t claim a housing allowance after you die and your heirs cannot claim one either. Everything in your 403(b) will be taxable once you are gone. Depending on your situation and the costs and investments available in your 403(b), you might want to move some of your money.

Qualified Charitable Distributions

Once you reach age 70 ½, you can do something called a Qualified Charitable Distribution (QCD) from an IRA where you send a check directly from the IRA to a charity and it completely bypasses your tax return. It is never reported to the IRS and does not count as taxable income. If you’re planning on making charitable donations in your later years, this is a great way to do it. 

QCDs can only be made from an IRA, so it might be best in your situation to move some of your 403(b) into an IRA for charitable purposes. The money still comes out tax-free and you lower the balance of the 403(b) that your spouse or heirs may have to pay taxes on. Remember, we never know when God will call us heavenward and it’s all taxable after that. 

Roth Conversions

Another way to minimize taxes from your retirement accounts is through Roth conversions. This is where you move money from a traditional pre-tax account to an after-tax account by paying taxes on it in the current year. You may have some low-income years, perhaps after you retire and before you start collecting Social Security benefits or while you take time off to go to seminary and live off of savings (so much better than student loans!). If your income is lower than the standard deduction, then you can convert the difference from a traditional account to a Roth IRA completely tax-free. It may even make sense to convert some of the account at a 10% or 12% tax rate if you think that your taxes will be higher in the future. 

How I Can Help

How do you know how to balance keeping money in your 403(b) for the housing allowance and rolling it into an IRA for QCDs or converting it to a Roth? Work with a financial planner! If you wanted to figure this stuff out yourself, you would have been a financial planner instead of a pastor. Tax strategies just don’t excite you the way that saving souls and helping people does. 

The thing is, tax strategies actually excite me. It’s a little embarrassing because it proves that I’m a total nerd, but it’s true. Since I’m into this stuff, I figured I might as well embrace it and use my nerdiness to help people like you. So I became a financial planner. 

Yes, I’m now officially a financial planner, state-registered and everything. I can now legally take on clients. The best part is, I don’t work alone. I’m part of an amazing team at Guide Financial Planning, so if you work with me, you’ll probably get to meet some of them too.  

If you’re looking for professional help, our team at Guide Financial Planning would be honored to have the opportunity to serve you. You can schedule a call with this link so we can get to know you, tell you more about ourselves, and see what the future may hold for us. 

PS – While I love pastors, I’m trained to work with the sheep as well. If you know any nice ones looking for financial help, go ahead and send them my way. We would be honored to serve them as well.

I am now officially a financial planner. When I tell people I’m a financial planner, they usually say something like, “So you do investing?” Most people think that financial planning is managing people’s stock and bond investments and some think it involves selling insurance. But it’s not that at all.

It’s just like when you say you are busy and people say, “Well what do you actually do besides preach on Sunday? What could possibly keep you busy Monday through Friday?” Sometimes that makes you want to smack your forehead or curl up into a fetal position and cry out, “Why, Lord?” Doesn’t it?

That’s because you are not a preacher, you are a pastor. Your job is to shepherd the people of God into Christlikeness and preaching is just a tiny part of that. If all you did was preach, the vast majority of the people under your care would not get to where God wants them to be. Your job is so much more than just preaching. It is counseling, studying, investing in your own relationship with God so that you are in a position to lead, coordinating volunteers so that people’s needs can be met, developing discipleship programs, training small group leaders so that more people in the church can receive one-on-one care, reviewing financial statements and making decisions so that you have a place to meet and staff to meet people’s needs, etc. You know that you could add a whole lot more to that list. 

Just like preaching is only a small part of pastoring, investments are only a small part of financial planning. Let me tell you what else there is.

Financial Planning is a Process

First of all, financial planning is a process. That’s why you add the -ing because it’s an ongoing process. There is a difference between a financial plan and financial planning. Financial planning is a holistic process of recognizing what matters to you in life and figuring out how to apply your finances to help you get from where you are to where you want to be. My job as a financial planner is to help people understand and manage their finances in a way that aligns with their values and moves them towards their goals. 

One misconception I had getting into this field is that a financial planner is supposed to tell people what to do with their money. My introduction to the financial world was through Dave Ramsey, so that makes sense. However, I’ve learned that my job is not to tell people what to do. My job is to analyze people’s finances and then educate them on their various options and the consequences of each. My job is not to make decisions for people but rather empower them to make their own decisions with confidence. The process of financial planning is ongoing because life is always changing and there are always new options, priorities, and decisions to be made. 

Financial Planning Vs. A Financial Plan

Now, at my firm, we offer both financial planning and financial plans. The difference is that while financial planning is ongoing, like discipleship, a financial plan only addresses where you are at one moment in time, more like a one-time counseling session. A financial plan looks at every area of your financial life (we’ll go over them below) and fits them all together like a puzzle in order to create the personalized picture that you want for your life. 

We always start everyone with a financial plan, but then each person gets to decide what they want to do moving forward. For some, the financial plan is enough of a foundation where they can take it and do their own financial planning going forward. Others decide that they want to work with us on an ongoing basis so they have someone to keep them accountable, bounce ideas off of, and help them navigate their ever-changing life and complex financial landscape. 

The Components of Financial Planning

If it’s “so much more than investing,” what do a financial plan and financial planning entail?

Goals

It starts with your goals. Do you ever get in the car and start driving without knowing where you’re going? I know some people might, but to me that’s ludicrous. You have to start with the end in mind in order to know what steps to take to get there. Financial planning is the same. Do you want to be able to serve a poor church? Do you want to be financially independent by age 50? Those are very different goals and the same person would end up with completely different financial plans depending on which one they wanted to achieve.

Cash Flow

Getting a handle on how much money you have coming in and how much money you have going out is the foundation of a financial plan. If you don’t know how much money you have, you don’t know what you have to work with to help you achieve your goals. It’s like when you cook from a recipe. You need to make sure you have all of the ingredients on hand, otherwise, it won’t work no matter how great the recipe looks. You need to plan your meal based on the ingredients you have on hand or go out and get more ingredients! So, the first step in financial planning is checking your pantry (or your income and spending) so you have a good idea of what you have to work with.

Financial Independence/Retirement Planning

One of the most common reasons people seek professional financial help is that they are thinking about retirement. Either they are younger and want to make sure they are doing what they need to in order to be able to retire someday, or they are getting close to wanting to retire and want to know if they can afford to. Even if you never want to retire, like me, it’s important to plan for a season of life in which you may not be able to earn an income. You never know when your health will fail or you’ll need to care for a loved one full-time or something else like that. As such, retirement or financial independence planning is a very important part of a financial plan. 

Investment Planning

Finally, investments! While they aren’t everything, investments are an important part of a financial plan because they help fund your goals. How well you do your investing affects how soon you’ll have the money necessary to achieve those goals. Whether your goal is retirement, a college education, or purchasing a home, it’s important to make sure that your investments align with your needs. 

What is your time horizon; do you need the money in two years or twenty? What is your risk tolerance; how much of the stock market’s ups and downs can you stomach? How much are you actually paying for your investments and how will that affect the amount of money you end up with? Good financial planning doesn’t stick you into a one-size-fits-all investment model or product, but rather provides concrete advice based on proven principles and your own personal financial and emotional needs. 

Protection Planning

I mentioned earlier that some of us don’t want to retire and saving for retirement is more of a defensive move. Well, there are some other defensive moves that you will want to take as well. You see, it’s just as important to watch your back as it is to charge forward with your financial life. One incident could completely derail a great plan or completely wipe out all of the gains that you worked so hard for. 

That’s where insurance comes in. Insurance protects you from the things that would keep you from moving forward. It doesn’t actually move you forward financially (no one likes paying premiums when they feel they get nothing in return) but it keeps you from going backward. Some of the protection we touch on in financial plans are emergency funds, life insurance, health insurance, disability insurance, long-term care insurance, homeowners or renters insurance, auto insurance, and umbrella insurance. 

Tax Planning

Usually, optimizing your finances means minimizing your taxes. Taxes can be a major drain on your income, so every area of your financial life, from the kind of retirement account you invest in to the type of investments you have in each account to how you do your charitable giving, needs to be viewed through a lens of not just how to minimize your taxes today, but how to minimize them over your entire lifetime. 

Charitable Giving Planning

God has called us to be generous givers. Some of that giving can help us save on taxes. If charitable giving is a part of your life (as I suspect it is), then your financial plan should also address strategies for maximizing the tax benefits of the charitable giving that you already do. 

Real Estate Planning

Now we’re getting into the sections that aren’t in every financial plan because they don’t apply to everyone. However, if owning a home or rental real estate is in your future or part of your current reality, then it needs to be addressed in your financial plan. This is especially important for pastors because you are eligible for the clergy housing allowance, which can save you a lot in taxes. Because of the expertise I’ve developed with this blog, I get brought in on every financial plan our firm writes for a pastor to ensure that they are optimizing their housing allowance and not leaving any money on the table. 

Education Planning

If you have kids that you want to send to college (or you want to go yourself), that needs to be a part of your financial plan. How much should you save? Where should you save it? Is there anything else you can do to avoid student loan debt? Those are all questions that financial planning should address. 

Debt Planning

Speaking of student debt, what do you do once you have it? With so many different repayment plans available, there are financial planners out there who specialize in working specifically with student loans. Your financial plan should include a plan for when and how your debt (of all kinds) will be paid based on your personal financial situation and priorities.

Estate Planning

Estate planning is a topic that needs to be addressed in a financial plan though the bulk of it belongs to lawyers. Financial planners cannot write wills or other estate planning documents, but it’s our job to help you see the importance of having those documents in place and making sure all of the beneficiary designations on your various accounts actually align with your final wishes. 

I just listed eleven areas of financial planning. And that’s not all there is! If you’re planning a large purchase, like a car, that should be included in your financial plan. If you have a special needs child, caring for them should be included in your financial plan. Parents that you’re responsible for? That needs to be in your plan as well. The above areas are the most common to each plan, but the areas that a plan addresses are as varied and countless as the people they are written for. 

I hope this gives you a clearer picture of what financial planning is. Don’t feel bad if you didn’t know before. Most people don’t know because it’s such a new profession. It was birthed out of insurance sales and stock brokering, so it isn’t any wonder most people think it’s all about investments and life insurance. Let me tell you, if that’s what it was, I wouldn’t be doing it. 

While financial planning does deal with numbers, the true focus is the client as a person with a specific and unique call of God on his or her life, and the numbers are simply a means to an end. In fact, I have heard it said on more than one occasion that financial planning is like secular pastoring. (Though at my firm we don’t keep it secular!)

Come back in two weeks to hear about how financial planning applies specifically to pastors and some of the strategies we use at my firm.

If this article has made you curious about the firm I work for and our approach to financial planning, check out our website. Schedule a free introductory phone call if you think you’re ready to do your own financial planning with us.