Financial Success Rarely Happens by Accident
Many people do not have a financial plan, yet they want to be financially successful. Good financial planning paves the way to financial success.
It is often said that people spend more time planning their next vacation than they spend planning for their future. This is certainly understandable, because vacations are fun.
Figuring out how to pay off debts, put the kids through college, reduce tax exposure, and retire without running out of money is not so much fun. It is, however, very necessary. A written financial plan adds structure, direction, and objectivity to these weighty decisions.
Financial Planning or Financial Advice?
Not every financial decision requires a detailed financial plan, at least not all the time. Sometimes, when the monetary amounts and the ultimate impact of the decision are not exceptionally weighty, all that is really needed is financial advice.
Many financial professionals provide a variety of financial advice, including bankers, stockbrokers, and insurance agents. For long-term, critical financial decisions, savvy investors often employ the services of a certified financial planner to assist them with crafting detailed financial plans to guide these decisions.
An effective financial plan begins with addressing questions such as, “What is important to you?” or “What do you want to accomplish?” Often, the response to this question is something along the lines of “to make more money” or more recently, “to not lose money.”
These general objectives are then refined down to their specifics by answering a series of increasingly detailed questions:
- How much more money?
- Money to do what?
- Put children or grandchildren through college?
- Donate to charity?
- When will these events happen?
- How long must the money last?
- And so on.
Detailed Financial Planning Goals
The more general a goal is (e.g., “to make money”), the more likely it is doomed to failure. Effective goals focus on details, deadlines, and measurement. A 45 year-old who wants to “retire with lots of money” has articulated a vague goal with no specifics and a very loose timeframe.
A better version of this retirement goal might be to retire at age 62 with a guaranteed income of at least $75,000 per year, adjusted for inflation. Additional specifics could include where to retire, travel plans, and more.
Another well-worn saying states that a goal without a deadline is only a dream. After articulating one’s goals and desires, it is equally important to set a deadline for achieving these goals. Having deadlines establishes accountability and helps measure progress toward the goal. Knowing the timeframe for achieving the goal also helps when selecting investment options to support the objective.
Transparency and Portability
A detailed written plan reduces the ambiguity and randomness that often accompanies important financial decisions. Many times, people make individual financial decisions in a vacuum without fully considering the effects of these decisions on other aspects of their lives.
Bringing it all together into a single plan can avoid crossover and duplication as well as identify critical planning gaps.
Having important financial details laid out in written form can also aid family members in the event of death or incapacitation.
In the midst of an already stressful event, the written financial plan can ease the difficulty somewhat for those who must assist with financial decisions or act on behalf of ill or deceased family members.
A written financial plan lends itself to portability. Whether the plan was self-generated or crafted with the aid of a professional financial planner, it can serve as the foundation for a fresh review by someone else.
If the plan owner desires a second opinion, or the original financial planner moves, retires, etc., the financial planning document clearly communicates how financial decisions were made and in what context.
Planning for Failure
This does not mean planning to fail. It means anticipating potential disasters and having a backup plan in place. Once a basic plan is prepared, what are the fall-back options if things don’t go according to the original plan?
Unexpected events and accidents happen to everyone. Although these events may be unavoidable, they don’t have to completely disrupt the original plan’s outcome.
The monetary effects of major financial disruptions, such as a death, disability, or property loss, can be mitigated through adequate amounts of insurance. Without a detailed plan, however, knowing how much and what types of insurance to purchase can be confusing.
Unfortunately, insurance purchases are typically made piecemeal, without much consideration for the larger financial picture. Many purchasers don’t consider the subject of insurance until they are approached by a salesperson, and then often grudgingly.
Financial failure also comes in the form of market losses for investors. Although there is no form of actual insurance against these losses, there are asset allocation strategies to manage the level of risk to which one is exposed.
If long-term investment decisions are made only on the basis of emotion, media hype, random choices, or the investment advice of well-meaning friends and associates, the result is likely to be out of sync with the investor’s actual needs and subject to excess volatility.
Integrated Planning and Peace of Mind
Although not every financial decision requires a detailed financial plan, having a plan in place helps make the major financial decisions easier.
Bringing together the elements of risk management, tax planning, investment allocation, estate planning and more, a written financial plan helps both client and financial consultant work together to meet the client’s needs.