Key Points
- Financial planning is a process of setting goals, creating a plan, and taking action to achieve those goals.
- Financial planning can help individuals and families achieve financial security and stability, build wealth, and prepare for a comfortable retirement.
- The top 5 ways financial planning can help include:
- Creating a budget and managing cash flow to help you save for short-term goals and build a solid financial foundation.
- Building a long-term investment strategy that aligns with your goals and risk tolerance, and helps you grow and protect your wealth over time.
- Managing debt and creating a plan to pay it off efficiently, which can help you save money on interest and improve your credit score.
- Protecting your assets and income with insurance coverage, such as life insurance, disability insurance, and long-term care insurance.
- Planning for retirement by creating a savings plan, estimating retirement expenses, and maximizing retirement account contributions.
Most of us know we should spend less than we earn and save whatever we don’t spend.
But when it comes to actually doing it, people tend to fall into two different groups:
- People who are trying to figure out how to afford their future (planners)
- Those who just kind of hope that things turn out (non-planners)
Non-planners typically save when they can, sometimes putting some amount that they’re okay with into their 401k not knowing if it’s enough or not. These people oftentimes will aim to pay off debt first (rather than saving) and are more likely to make spur-of-the-moment “happy” purchases, rarely have a budget, and don’t really know how they’re going to afford their future but hope things will be okay.
Alternatively, planners generally know what they’re saving for, how much they need to put away every month, what to do if things go wrong and how long it will take them to reach their goals.
Does the first type sound more like you? If so, you’re not alone: Only 23% of Americans have a written retirement plan. Of the rest, over half said they didn’t have enough money to make a plan worthwhile. Others said it was too complicated, or they didn’t have time to develop a plan.
At Progress Wealth Management, we believe that everyone needs a plan for the future no matter what happens.
What is Financial Planning and How Does it Actually Help?
In the rush of daily life, planning for anything more than a few days in advance can seem like a headache and pointless. With that being said, it’s natural to wonder: Does financial planning really help, and if so, how? Is it really worth my time?
We think it does. Here are five reasons why:
1. A written financial plan increases confidence
It’s well known that over 65% of people with a written financial plan say they feel financially stable, while only 40% of those without a plan feel the same level of comfort. Fifty-four percent of “planners” felt “very confident” they would reach their financial goals, compared with only 18% of non-planners.
Having a written financial plan gives you a measurable goal to work towards and breaks it down into step-by-step actions you can do immediately to help you create your future with the actions you complete, today. Because you can track your progress and success in implementing the plan, you can reduce doubt or uncertainty about your decisions and make adjustments to help overcome obstacles that could derail you.
2. A financial plan can make it easier to save and grow your life savings, even if you don’t have a lot of money
The most common reason cited for not having a plan is “I don’t have enough money.” This is 100% inaccurate. A financial plan isn’t just for the wealthy; it’s for everyone.
Here are a few questions that nearly everyone can benefit from getting answered:
- Can you earn more than you are with your skillset and how can you get there
- How much can you afford to spend each month
- How should you approach paying off debt
- How much and what type of insurance should you have
- How much should you aim to save every month
- How much should you have in an emergency account at all times
- Should you pursue additional/new certification, degree, skillset, etc
- How to invest with what little savings you have
- How you should approach your plan to lower your current and future tax burden
- How to set SMART goals
- What you can do TODAY to make long-term goals more achievable
- … and much much more.
The fact of the matter is: poor households need financial planning just as much as rich ones do (if not more) because debt, compensation analysis/negotiation, budgeting, and staying disciplined are all things that are disproportionately more important for impoverished households than wealthy ones.
3. A financial plan can help you create an investment portfolio
Your financial plan can give you the full lay of the land: You’ll know what your goals are, how much time you have to reach them, and how comfortable you are with risk. Once you have a comprehensive view of your financial life and your goals, you can figure out how to start taking real steps forward.
That will involve both saving—setting aside the money you’ll need in the short term or for emergencies—budgeting, which is ensuring you’re spending consciously and purposefully every month—and investing, which is setting aside the money you’ll need in the long term and that, ideally, can grow. And with your financial plan as a roadmap, you’ll be better able to make more thoughtful investing decisions—instead of just hoping good things happen when you buy whatever hot stock your neighbor recommended.
4. A financial plan can lead to better habits
Financial planning isn’t just about investing; it’s about what money can do for your confidence, security, and quality of life—such as the protection that life insurance offers or the peace of mind that an emergency fund can provide. Research also shows that planning supports sound money habits as well.
Americans who have a financial plan also have healthier finances and better money habits
There are good investing habits, and there are healthy money habits. A written financial plan can lead to both. Good money habits include limiting spending to what’s reasonable, taking on debt unnecessarily, and saving purposefully as well as many other key behaviors that can make your future easier to create.
5. Financial Planning can be tailored to every personality type
Your approach to life can influence every decision you make, including those that involve your finances. By understanding the type of person you are with regard to planning, you can take proper steps toward reaching your financial goals.
Here are six types of financial planning personalities:
- Organizer: Organizers love lists. Categorizing and arranging everything from their sock drawer to their personal finances gives them a warm, fuzzy feeling.
- Architect: Architects are masters of both creativity and logic. They not only imagine the future but design solutions to make it happen.
- Philosopher: Taken from the Greek word meaning “lover of wisdom,” philosophers enjoy thinking about and solving problems.
- Dreamer: Dreamers are the free spirits of our world who shake their head in confusion at all those who schedule their lives to the last detail.
- Improviser: Improvisers are typically quite self-sufficient with a deep desire for independence and doing things their own way.
- Maverick: Mavericks are unafraid and unapologetic individuals who would rather reshape their world than try to fit in it.
How can we build a custom financial plan according to your personality?
For people who like to know,
For organizers, architects, and philosophers, forethought and proactively finding solutions are in their nature. A written financial plan can offer a sense of security while leaving room for improvement and possible growth.
Dreamers, improvisers, and mavericks may prefer spontaneity, but even a bit of planning can significantly help them achieve the freedom to live the way they want while fulfilling the future they imagine. A written plan can provide the structure to keep them financially grounded while allowing them to make changes on the fly or use their earnings to support a carefree lifestyle.
Why consider a professional financial planner?
Research has shown that households that work with a professional financial planner were more likely to make better financial decisions than those without a planner, taking into account portfolio risk levels, savings habits, life insurance coverage, revolving credit card balances, and emergency savings.2
In a study published in the Journal of Financial Planning, David M. Blanchett, Ph.D., CFA, CFP®, used six rounds of the triennial Federal Reserve Board’s Survey of Consumer Finances (from 2001 to 2016) to examine the results achieved by people using four information sources: financial planners (defined as advisors who provided more holistic services); transactional financial advisors (such as a banker or broker); friends; or the internet.
“Households working with a financial planner were found to be making the best overall financial decisions, followed by those using the internet, while those working with a transactional adviser were making the worst financial decisions,” Blanchett wrote.
The Bottom line:
A financial plan may sound like a chore. But for successful investors, it’s the foundation on which to build, understand and achieve your goals. Having a written plan can increase confidence and result in more constructive financial behavior. However, the potential value of financial advice may vary based on the nature of the planning engagement. People working with a financial planner who is taking a holistic look at their needs, beyond just products and portfolio, are likely better off than those working with a planner who takes a transactional approach.
