How much time and effort did you put into planning your last vacation? If you are married, how much time and effort did you put into planning your wedding and honeymoon? Now, how much time and effort do you put into planning to meet your financial goals, such as personal cash flow management, risk management, tax management, college funding, retirement funding, or estate planning? It is my belief that most people put little time or effort into financial planning. The following are some possible reasons:
- It is not required. If you have more than a minimal amount of income, the law requires that you file an income tax return every year. If you own a car, you must obtain automobile liability insurance or post a bond in most states. There is no law, however, that requires people to implement a financial planning process.
- It may expose difficult choices. The first step in the financial planning process is to establish your financial goals. “That’s easy,” you might say. “I want to live in a nice house, send my children to private school, help those in need, and retire comfortably.” To that, I would ask, “how would you place these goals in priority order?” Financial planning might force some difficult personal decisions. I believe that it is human nature to avoid difficult decisions until some external event forces us to make them.
- It requires organization and effort. Just gathering data to prepare a financial plan is a lot of work. You will need details about your assets, liabilities, income, expenses, income taxes, insurance policies, investments, retirement benefits, etc.
- There are no easy and comprehensive tools for the non-professional. Sure, there are online retirement calculators that will estimate how much you need to save for retirement based on a few simple assumptions, like your retirement age, current savings, and assumed investment return. Generally, these calculators cannot, however, account for complications such as fluctuating income, equity compensation, pensions that do not adjust for inflation, required minimum distributions, varied tax rates, support for dependents, and asset sales. There are professional-grade financial planning software packages that might be able handle some of these situations, but they generally cost over $1,000 and may be difficult to learn and use for the layperson. For my clients, I create customized spreadsheet models that can account for these types of financial complications.
- It is expensive to hire a good financial planner. For a professional financial planner to create a proper financial plan, it takes substantial time and effort to understand your personal and financial situation, gather and organize relevant data, make judgments about assumptions, prepare financial analyses, and explain the results to you. Accordingly, a comprehensive financial plan might cost several thousand dollars.
Despite these obstacles, the benefits of implementing a financial planning process are significant. You will have more clarity about how your personal values relate to your financial goals. You will know whether you are on track to meet your goals. The planning process may expose opportunities and risks that you did not know previously. Finally, planning should give you more confidence about your financial decisions.