Do you have a nagging feeling that it is time to get your finances in order? Perhaps you are wondering if you are on the right track toward retirement. Or, maybe, there has been a change in your life, and you want to make sure that you are making sound financial decisions. Although I would never suggest that financial planning solves every dilemma, it can certainly provide clarity and confidence while alleviating stress. To show you what I mean, below are six benefits of financial planning that many say they wish they had known earlier.
Now, before we press forward, let’s be sure you are in the right place.
What is a Financial Plan?
A financial plan is a working document that outlines your current and anticipated assets, liabilities, and sources of income, then projects how your financial situation is likely to play out, given your trajectory. People use financial plans to manage their personal spending and saving behaviors, and business leaders create them to run organizations. As a holistic financial planner and CFPⓇ practitioner, I work with individuals, so that will be our focus here.
Many see financial planning as something to do when you are at a crossroads, and some even wait until a crisis occurs. But, while financial planning certainly comes in handy at these moments, the real value comes from thinking ahead because it empowers you to be proactive about getting what you want from your life so you can relax and enjoy it. So, with that in mind, let’s dig in.
Six Benefits of Financial Planning
- Financial Planning Helps You Evaluate Your Goals
- A Financial Plan Provides Insights to Guide Your Decisions
- Sound Planning Empowers You to Anticipate and Prepare for Obstacles
- Planning for Your Financial Future Can Lead to Greater Confidence
- A Plan Emboldens You to Pursue Life Satisfaction and Happiness
- Financial Planning Typically Results in Better Outcomes
1. Financial Planning Helps You Evaluate Your Financial and Life Goals
As young adults, we develop and set out to achieve our hopes and dreams, but we are often short-sighted. After all, at the age of 20, we find it hard enough to imagine our life at 30, let alone 40 or 50 years of age.
So you may reach your goals and perhaps even add a life partner and kids to the mix sooner than you expect, only to find yourself wondering, “Is this it?” Or, you may find that your priorities shift, leaving you feeling behind the ball and overwhelmed.
Financial planning is an opportunity for a reset. It helps you to reconsider and prioritize how you spend your time and discover holes in your thinking so you can address them. For example, one of the benefits of financial planning is that you get to explore answers to questions like the following:
- Where do I want to live today and in the future?
- How do my dreams compare to my partner’s, and how can we bridge any disconnects?
- When do I want to retire, and how do I want to spend that time?
- What would make me feel like I am living a good life?
That last question may seem straightforward, but it can be the most interesting. For example, we often work with clients who are doing well but want to give back to the community and are unclear about how they can afford to do so. In these cases, our role is to help them develop creative yet impactful strategies to make their vision a reality while continuing to save for retirement.
2. A Financial Plan Provides Invaluable Insights to Guide Your Decisions
Setting goals is a good starting point. Then, once you know what you want, you can look at where you are today, what it will take to reach those goals, and how to enjoy yourself in the meantime.
For instance, knowing how much you need for necessities and retirement will help you understand how much you can spend on hobbies and vacations. And seeing how high-interest credit cards affect your bottom line can provide the motivation you need to buy down debt. But, the real magic happens once you get past the basics and can explore other questions, such as:
- Can I afford to change jobs, pursue a graduate degree, or start a new business without blowing up my retirement plans?
- How much home, umbrella, or life insurance do I need to protect my family?
- Can I support my desire to give to my community (while also building wealth) by investing in ESG funds?
- How will I afford health care if I stop working before I am eligible for Medicare?
- Given my time horizon, risk profile, and financial resources, do I have the right mix of assets and investment accounts?
3. Financial Planning Empowers You to Anticipate and Prepare for Financial Obstacles
One significant benefit of financial planning is it gives you the space to explore the concerns that keep you up at night and develop strategies for how you might address them.
For example, many worry about how they would manage if they lost their job. And as people get closer to retirement, we’ve noticed that they often fret about market crashes, even going so far as to suggest that there is a risk that they could become homeless.
Since a financial plan sets expectations for the future (given your trajectory), it also allows you to model the potential impact of different scenarios. In doing so, you can explore how you might handle them, which can go a long way toward calming your fears.
For example, you might examine the impact of providing financial support to your aging parents, paying more for your child’s education, or the death of a partner. Doing so might help you see that you need to purchase insurance, invest in estate planning, or do more to save money. It will also help you make better decisions when these occasions arise and emotions are high.
4. Planning for Your Financial Future Can Lead to Greater Confidence
When you set goals and create a financial plan for achieving them, you gain confidence in the future. Many describe this as having “peace of mind.” Furthermore, if you are part of a couple, you may find that discussing what you wish to achieve and how to do so can help you get on the same page and avoid fighting over money, instilling a sense of calm in your family.
For instance, when we learned that one of our clients was planning a second marriage, we saw that as our cue to step up. Although she was comfortable in the relationship and optimistic about the future, she also knew combining two independent financial situations and accommodating children from prior lives would add complexity.
So we reevaluated her finances, insurance, policies, and estate arrangements before she got married to ensure that she would stay on track, giving her the confidence to relax and enjoy her new life.
5. Planning Emboldens You to Pursue Life Satisfaction and Happiness
Stepping away from the grind and thinking critically about why you do what you do and how you want your life to evolve is vital. In doing so, you get to notice how far you have come and ensure that you stay on the right path, giving your day-to-day activities more meaning.
One of my clients told me that the process had enabled them to get into a better financial position than they thought was possible. Initially, this puzzled me, but I’ve realized that sometimes people go about working, getting raises, and taking care of their families but never think strategically about their personal finances. After all, unless you broke something, why fix it, right?
But this is what can lead to “lifestyle creep.”
When you are doing well, saying “yes” to home remodels, expensive private schools, or extravagant vacations becomes easy, but it can also throw you off track. So it is important to pause occasionally to think about what you want and how you can be proactive about achieving it instead of just letting life happen. But, of course, we know this intuitively, and that’s why we get uncomfortable when things begin to slip.
Most of our clients are unimpressed by wealth for the sake of wealth. Instead, they want balance. They want to know they are being responsible with their money so they can enjoy their lives and stop working at some point. Then, they want us to help them develop sensible and tax-efficient withdrawal strategies so their money will last. They value our insight because we work with people in similar situations and can tell them when they need to adjust and when it’s ok to give themselves a break.
6. Financial Planning Typically Results in Better Outcomes
No one knows what the future holds, and we cannot guarantee a specific result. However, we are way more likely to get what we want if we set targets and develop sound strategies for hitting them. So, I would encourage everyone to build a financial plan, even if you are young and single, with little more than a bank account, credit card, and 401k plan. At the very least, create a simple spreadsheet, set some basic goals, and plot out how things will likely evolve as you move forward.
As your life (and finances) become more complicated, you may decide that while you are incredibly skilled at some things, you simply do not have the time, patience, or expertise to manage your investments. Furthermore, you may notice that the world is full of conflicting, anxiety-provoking financial advice that (if followed) puts you at risk of making bad decisions. At this point, it might be best to hire an expert.
How Can an Expert Help?
Working with a financial planner is a little like hiring a contractor for a kitchen remodel, except, in this case, you are hiring someone to oversee your economic life. Although you may be perfectly capable of doing some of the work yourself, they are trained professionals who can act as a voice of reason during moments of uncertainty, making a positive outcome more likely.
For example, many investors move their money around in response to disturbing headlines or recommendations from industry influencers, unintentionally engaging in market timing activities. But unfortunately, these behaviors often lead to costly mistakes. Indeed, DALBAR’s 2022 QAIB Report documents this phenomenon, showing that it typically results in subpar portfolio performance.
As you can see, over a 30-year timeframe, the S&P 500 index outperformed the average equity fund investor by over 3% per year. Therefore, in many cases, the financial planner’s role is to act as a behavioral coach. They translate sensational news and advice and remind you of your long-term plans, so you can avoid making emotional, fear-based decisions.
In addition to helping you develop plans and make decisions, financial planners bring in and direct the work of specialists, like your insurance company, tax accountant, or estate planner. Then, they coach you through pivotal events like the sale of a business, the death of your parents, or a divorce.
The Drawbacks of Financial Planning
Now, make no mistake, although a lack of a financial plan may be one of the biggest obstacles to getting what you want from life, creating and sticking with one isn’t easy. It takes time, patience, determination, and a willingness to be honest with yourself about what is and is not possible. Therefore, it is vital to know the challenges involved so you can decide when you are ready to do the work.
To that end, here is what you can expect.
1. Financial Planning Requires a Lot of Upfront Work
As our lives evolve, we get busy, and our finances become more complicated, so it is common for things to become disorganized. However, the only way to put together a financial plan is to gather everything you know about your financial situation into one place. That includes your bank accounts, liabilities, and information about your assets, insurance, investments, businesses, etc.
The process of financial planning is like cleaning out a closet. The only way to be effective is to pull everything out (making a big mess), so you can inspect it and develop a better system before putting each item in its proper place. It is a significant endeavor, but in the end, eliminating your financial clutter will help you establish a stronger foundation for the future.
Furthermore, if you choose to work with a professional, sharing your sensitive financial information (not to mention your hangups) with a virtual stranger can feel invasive. However, it may help you to know that a good financial advisor is 100% on your side and they have seen it all before. Therefore, they will not judge and must be discrete.
2. You Must Commit to a Financial Plan for It to Work
Financial planning is not a set-it-and-forget-it activity. Once you establish financial goals and build the plan, you must follow through, implementing any changes. If you hire a holistic financial planner, you can expect concierge services while executing your strategy. But you still need to save money, engage with your advisor, and keep things up to date.
Then, once the initial flurry of activity is over, you must stick to the plan, checking in periodically to see how you are doing and make adjustments. Most of the time, this effort will be minor, but you must remain active, involved, and ready to deal with any problems.
3. You May Not Like What You Learn
Anytime you take a critical look in the mirror, there is a risk that you will not like what you see. For example, you may discover that your dream of retiring at 55 is virtually unattainable unless you make some severe sacrifices. But interestingly enough, we have found that even when the news is disappointing, people appreciate the clarity. It gives them the information they need to regroup and either come up with creative ways to get what they want or adjust their plans to something more attainable.
If you have decided that the benefits of financial planning outweigh the drawbacks and that this is a path worth pursuing, the next step is to determine if this is something you want to do yourself or if you prefer to get help.
If you decide to work with a financial planner, find someone with a CFPⓇ certification. The Certified Financial Planner Board of Standards, Inc. (CFP Board) only awards this designation to those who have completed countless hours of education and have agreed to put their client’s best interest before their own.