Why Do You Need a Financial Plan?

What is the value of a financial plan vs just doing the best you can?

Information and misinformation. There is so much of it out there that it is hard not to be tricked on a daily basis. Think about all of the discussions you have had at work that have pointed you in the wrong direction regarding 401(k)s, taxes, investments, college or retirement. That’s why a good financial plan is so valuable. 

If you listen to the newscasters over a period of months in a down cycle, you will come to the accidental conclusion that the best thing you could do is sell all of your investments.  And who buys these investments for a discount, the smart rich people.  The result? You lock in your losses and leave the upside to them.

Other Items to Watch out for:

The tax code – anyone feel like the tax code is kicking their butt? Don’t you think you could do much better if the tax system was fair enough for you to understand? Don’t take tax advice from a news guy, a neighbor, or even a financial professional who does not know your real tax situation. Most People miss big opportunities to pay less income tax.

The financial services industry – Credit card companies say that you deserve to go into debt with their rewards program. Insurance companies may try to sell you the largest policies possible, with all the extras. Banks call 1% a high yield and tell you an IRA can only be a CD.  Some brokers over-sell restrictive or risky or expensive investments (they pay the best commissions). You may not always be getting the best advice from the financial industry so be cautious.

Seek Good Advice for your Financial Plan:

There are many well-meaning, qualified and experienced financial professionals out there. You just need to know what to watch out for.  Some professionals are over-zealous about their angle on the business. They may direct you into strategies that work well for them, but may not be very good for you. They may also have a very limited field of experience. Maybe they are new to the industry. Maybe they only have experience with banking or insurance. If you are young or your situation is very simple, then working with a financial person with limited experience is fine. If you are older, or your situation is more complicated, you should be working with a well-rounded and experienced financial advisor to develop your financial plan.

Don’t Trick Yourself.

Here are some prime examples of what I mean:

  • Procrastination: I don’t know what to do, so I will just put it off. I am never going to retire, so I don’t need to plan for it. Trust me, one day your brain, your boss or your body, is going to stop you from working.
  • Underestimating: most people severely underestimate how much savings they will need and what rate of return they will need to retire on.
  • Free money: try to never leave handouts behind. Things like a company match in a 401(k), special deals on company stock and pre-tax flexible spending accounts are things that many employees ignore. If these are available to you, they can all add to your wealth.
  • We don’t need that much life insurance: If you are married or have dependents, you probably need more than you think. And it is probably cheaper than you think.
  • Doing what everyone else is doing: Don’t look at your peers, look at your elders. Don’t Ignore the age-old wisdom of our elder generations. Guess what? The depression era generation is mostly right! Follow their typical advice, and you will generally do well. Don’t overspend, pay off monthly credit card balances, pay down loans while you are young, save for retirement, and always keep some money in the bank for emergencies.

A Good Financial Plan…

A good financial plan can help you take advantage of proven strategies that you might otherwise miss out on. It takes all of the proper advantages of the best strategies for your banking, investing, insurance, tax, retirement, and eldercare planning needs. These all cross over into each other, so it is important to look at each area carefully. Why does one retired person pay half the income tax as another person with the same income and the same asset level? Why does one person get good investment returns going through a recession while another loses a bunch of money? Using proven strategies that are integrated in a customized way for you, is how you make the most of what you have. 

Strategies to Keep in Mind:

Avoid Mistakes – With investing, half the battle is just avoiding investment mistakes. Sticking with a good investment strategy, that is right for you is the other half of the battle. With tax planning, the key is having a long-term tax projection. This helps you decide when to defer, and when to intentionally pay more taxes. Most people miss opportunities to pay half the tax rate on some stuff and no tax on some other stuff. With insurance, the idea is to cover what needs to be covered without spending too much money on insurance. Having a poorly thought out estate plan is another big mistake.

Don’t miss opportunities – You will need to be brave enough, and knowledgeable enough, to take advantage of opportunities as they present themselves.

Balance – With retirement the key is balance. During your working years you have to balance a reasonable spending amount with a reasonable savings amount. In retirement, you need a healthy budget that provides enough to live on while keeping enough resources for the future. Think about three different people who retire with a million dollars:

  1. The first person spends too fast and is in poverty by age 80, then lives to age 95.
  2. Another, fears running out of money, lives in poverty, and dies with five million dollars at age 95.
  3. The third lives comfortably, feels secure, and dies with a modest amount of money at age 95.

Why Work with a Financial Planner?

It is incredibly difficult to avoid all of these mistakes without a carefully crafted plan. A random approach is a terrible financial plan. A person who pays careful attention to their finances, and becomes educated about financial matters, will do better than a random approach. It is very difficult, even for someone making a very good effort, to avoid the misinformation that is out there. They are still likely to miss a lot of important strategies.

Put together a solid financial plan. We recommend that people use what is called a “Cash Flow Based” financial plan. This approach looks at the real situation and provides detailed projections to help make the smartest and most balanced financial decisions.

Consider working with a professional financial planner. Some people can do well enough at avoiding mistakes. But most people will miss out on many advantages of proven strategies if they don’t work with a professional. It takes a professional to take advantage of all the hidden strategies that are out there waiting for you. Consider working with a qualified financial planner to map out a clear path to your financial future.

Here are a couple of places to begin the search:

     Fee Only Advisors – NAPFA

     Certified Financial Planner

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