Six Benefits of Financial Planning
Planning is Everything. The Plan is Nothing. ~Dwight D. Eisenhower
Welcome to RetireMentorship, Your Mentor To and Through Retirement. I am your host, Freeman Linde, Certified Financial Planner®.
Today we examine the Six Benefits of Financial Planning. Financial planning is valuable, and today we examine six beneficial aspects of financial planning and how they relate to you. These are not financial planning areas, such as investing or tax, but rather benefits of planning that relate to each of the areas. That’s coming up on the RetireMentorship Podcast.
First, the RetireMentorship Two-Min Tune-In. The primary points of the podcast in two minutes.
There are six benefits of Financial Planning, which I’ve adapted from Mitch Anthony’s work. The benefits are:
- Organization – Helping you put the pieces of your financial life in order.
- Education – Helping you understand how all of your financial picture fits together.
- Visualization – Helping you see the potential long-term effects of financial decisions.
- Accountability – Helping you stay on track to meet your financial goals.
- Proactivity – Helping you address issues before they become problems.
- Objectivity – Helping you make hard choices and good decisions.
These benefits apply to every area of finance, and over time can significantly improve your results and your peace of mind.
Let’s look at them in-depth on this episode of the RetireMentorship Podcast.
Six Benefits of Financial Planning
Financial planning is a broad topic that covers all areas of personal finance, including investing, cash flow, net worth, taxes, estate planning, insurance, and retirement. But Financial Planning isn’t merely generating a plan (and surely not printing an eighty-page report). It is an ongoing process, and potentially an ongoing relationship with a planner, that helps you with all those areas.
A Financial Plan is not something you create once. It is a process of planning that you commit to on an ongoing basis. Perhaps 1% of Americans have what it takes to complete all their financial planning alone. The rest of us will need a planner who can help deliver these six benefits across all areas.
We do not need a planner to deliver an eighty-page binder that will supposedly work for the next thirty years. We need one committed to the ongoing learning and mentoring we will need along the way. As Carl Richards puts it, “Great financial planners are guides in a changing landscape, not defenders of outdated maps.” As the world changes, the plan elements need to change, and our planning will adapt accordingly.
Let’s look at these benefits one at a time and explore why they are essential.
Organization
Let’s face it. Many of us are a hot mess when it comes to our finances. We don’t know what we have, where it is, or what it’s worth. We’ve accumulated some investments in separate accounts at different firms. We have a collection of insurance policies, but we’d be hard-pressed to say exactly how much coverage we have and what we are paying for it. We may have some miscellaneous estate documents buried somewhere, but probably not. And our cash flow? A mess.
Financial planning forces us to organize. Effective planning cannot occur until everything is known and organized. Depending on your current level of financial order, this may be an enormous task. But there is a peace of mind that comes when you finally know where everything is and what it is worth.
Planning can help facilitate this in several ways.
Checklists. When you first begin planning, you will often be given a checklist of all the items you need to pull together. Again, this can be daunting, but even having a list helps you systematize what to get and where.
Folders. Organizing all your finances in digital or physical folders helps keep it orderly, not only in life but also in your mind. Decluttering your finances helps to declutter your mind and help you think about the important aspects of life.
Dashboard. Planning may include a digital dashboard that will aggregate all your accounts and finances into one place. No more needing to login to multiple websites or review multiple statements. Everything you need, organized into one place. Clean. Efficient.
One Page Plan. A good plan will give you all the recommendations of proceeding with each area on one or two pages. The organized list of recommendations will give you actionable and orderly items to keep your finances moving in a tidy fashion.
It’s hard to make progress in your financial life when it is scattered everywhere. Organization is often the first step in financial planning and gives you a foundation to walk through other planning aspects. Whether you do this alone or recruit and delegate it to a planner to help, organizing is a great place to start.
Education
We don’t know a lot about finance in America. It’s not a required class in high school or college. Beyond some basics that we pick up, many of us don’t know much. What we do know is often pieced together from many sources and can be conflicting.
Financial planning can educate you on the parts of financial planning that are relevant and specific to you.
Learning everything there is to know about finances is a waste of time and energy. Most of it will not be relevant. Planning eliminates the fluff and specifies the rules-of-thumb to your situation.
Investing, tax, and insurance are closely related, as are contributions, distributions, and estate planning. You can’t separate them. But knowing how they all work together is also a lot to learn.
Planning helps us understand how they all fit together. How does contributing to Roth vs. Traditional impact our retirement and Social Security? How is it that using this specific cash flow strategy eliminates the need to pay for that type of insurance? Do I need a Trust, or is a Will sufficient, and how do they affect my retirement funds? Planning helps to answer all these questions and more.
As discussed in Episode 3, education and understanding are essential to making sound financial decisions and receiving beneficial outcomes. You can’t do what you don’t know. And if you’ve never heard of it, you can’t believe it. Educating yourself or receiving the right education is imperative.
As the old proverb states, “Wisdom is supreme. Therefore, get wisdom. Though it cost you everything, gain understanding.”
Education cannot be overstated. You can educate yourself. Pick up the right books and commit to the hundred-plus hours of reading you’ll need to understand how to do it yourself. Then make sure you do it. Or employ an excellent planner to educate you in a few hours about what you need to know. Do whichever you will actually do.
Visualization
Many of us are visual learners. Podcasts are great, as far as they go. You can listen while driving, mowing the lawn, shoveling snow, or working out. I love a good podcast or audiobook.
But for in-depth topics, a picture is truly worth a thousand words or more. We can finally see what people are talking about and better understand how it affects us.
In my planning practice, we do this in a couple of ways.
We draw—a lot. I’m no artist (that would be my wife), but I can doodle. And often, the little black, red, blue, and green doodles that I draw illustrate a point better than I ever could with words alone. A whiteboard session can be more valuable than an entire book! Visualizing a concept helps make it stick and gives us better recall when trying to remember it later.
We also use financial planning software to help illustrate current results and the potential future outcomes of decisions we make now.
Some decisions we make in planning have an enormous immediate impact. A doodle can help us understand that. “You’re way overpaying for your home and auto insurance. Here is the coverage you need; this is what it should cost. Enjoy the thousand dollar savings.”
Other decisions we will not notice in the short-term but make a massive difference in the long-term. If you take off in a jet from Los Angeles, all it takes is pointing the nose of the jet a couple degrees north or south, and you’ll end up in New York or Miami. Similarly, small investing choices we make now can have massive impacts down the road.
When you can see how a decision impacts your long-term, it’s easier to believe in it and act on it. For example, a recommendation may be to embark on a Roth conversion strategy. After some education on Roth vs. Traditional and how Roth conversions work, the scenario is laid out in the planning software. Then you see with your own eyes not merely how much in taxes you will save over your lifetime, but how much that saving could end up being when left invested. It’s a powerful sight!
“Okay. Paying $20,000 more in taxes this year bites. That’s straight painful. But after seeing how much it will be worth in the long-run, I can see why we would do it. How do we start?”
Visualization is a crucial element of understanding key concepts and believing and doing key strategies. It’s a powerful component.
Accountability
A focus of financial planning is doing. Knowing and not doing is the same as not knowing. And you can organize your finances, educate yourself on what you should do with them, and see some neat visuals that inspire you to act on that education. But if you don’t do any of it, it’s worthless.
Many of us struggle with doing the financial items we need to do. Not because we are lazy or ignorant, but usually because we are busy. We know financial tasks are critical, but they aren’t particularly urgent.
I’ve got errands to run and chores to do and events to attend and family to care for and projects at work to complete and more! And most of those tasks have deadlines. There is an urgency there. But properly allocating my 401(k) or getting my Will done can wait. Right? They can wait a week, or a month… or a year… or a decade. Oh wow. I should really do that.
All of these delays are costing you money.
- Overpaying on home & auto insurance for five years. Cost: $3,000 in extra premiums.
- Missing a tax strategy for ten years. Cost: $15,000 in extra taxes, plus $6,000 in opportunity costs on those savings you could have invested
- Not completing your estate plan. Cost: $30,000 in probate attorney’s fees.
- Poorly allocated 401(k) over twenty years. Cost: $220,000 in missed investment gains.
Financial planning, especially with a planner, gives you the accountability to get these actions done when they need to be done. Now external deadlines are imposed, turning important-but-not-urgent to important-and-urgent. The accountability of another person in the mix helps you turn should into did.
Accountability helps you first overcome the inertia of getting started and then helps keep you on track so that you don’t fall back into old ways. Unless you perfectly stick to diet and exercise plans, run your own company where you report to no one, correctly get all your work done, and perfectly complete your other tasks without help, you probably need accountability.
It amazes me how little we focus on accountability and also how much of it is already baked into our lives without us knowing it. And yet, we opt out of accountability in our finances.
I’ll give you one example. The vast majority of people in the U.S. work for someone else. A small number of us run our private businesses or freelance, but even then, we under a board of directors or minimally accountable to our customers. But most of us are employed (or retired).
The only reason someone would hire you is that you will cost less than what you will bring in to the company.
Let’s say you are a software engineer making $120,000 per year. If the company is paying you that, then you are making them more money than that. Let’s say they are turning around and selling your work in the end product for $200,000 per year. You could arguably go out and sell your work directly to the end consumer for $200,000 per year. You working for that company is “costing” you $80,000 per year.
So why work for a company instead of doing it yourself? A bunch of reasons.
You may lack the knowledge and skills necessary to market and sell your end product. You make lack the ideas and strategy to come up with the product itself. You may lack the discipline to complete the work on your own, day after day, week after week, with no oversight or direction. For all those reasons and more, you work for someone else and “pay” them a portion of your effort for the value they bring to you as a worker.
In the same way, you may lack the education and discipline to do everything you should be doing with your finances consistently. For this reason, it makes sense to work with a financial team (your coworkers) that will provide the necessary skills to round out your financial life. And it makes sense to have a planner (your supervisor) to educate you on what you need to do, provide direction, feedback, and guidance, and hold you accountable for getting it done.
It may “cost” you, but not nearly what inaction will cost. Get the accountability you need. Get it done.
Proactivity
Most aspects of finances are in the important-but-not-urgent category of Steven Covey’s famous matrix. And we are faced with enough urgent tasks in life that the important continue to get delayed—the tyranny of the urgent.
Some delays are costing you every day that you don’t implement them. Items like allocating your investments correctly, paying the right amount for insurance, and paying every dime in taxes you owe without leaving a tip, cost you real money each day you dawdle.
Other items don’t cost you a dime to delay until it’s too late.
It doesn’t cost you more money to be underinsured on auto-insurance. It may be saving you some money until you cause an accident and create $400,000 in damage. Suddenly your cut-rate insurance coverage of $100,000 is woefully insufficient, and you are on the hook for another $300,000 of damages!
And you can get more coverage after the accident. But it won’t help you with your current trouble. No amount of profitable investing or tax-saving strategy will make up for the $300k you owe. No amount of reactivity will fix it. There was only one solution to this problem:
You should have been proactive and gotten the right insurance when you had the chance. But you didn’t. Because it wasn’t urgent, and it wasn’t an issue. Now it’s a big problem.
Planning will help you be proactive on the issues you have and address them before they become problems. Some of these items we know we need to do, and the accountability of planning can help us proactively solve them. Some of them are blindspots. The education of planning will help proactively solve the issues you don’t even know you have.
Reactivity rarely works. Proactivity is what you need.
Objectivity
There are a lot of hard decisions we need to make in finance. And there are often a lot of emotions tied up in the decisions we need to make. It can be difficult or impossible to make those decisions objectively. There are too many biases and misconceptions.
Planning helps provide the objectivity you will need to make those hard choices and sound decisions. Whether it is educating and visualizing a better solution that will help you be objective, or letting an objective third party decide for you, the outcomes can improve from that objective element.
Objectivity is crucial when spouses differ about a decision. It can be hard to unwrap all the different emotions that a relationship adds to the decision. A third party could be what you need to break the tie, or tactfully show you how you were both right and wrong and present a third option.
We are, by definition, unable to see our blindsides and weaknesses. An objective financial plan and planner help solve these problems.
These are the six benefits of financial planning that can help improve all elements of your financial life.
- Organization – Helping you put the pieces of your financial life in order.
- Education – Helping you understand how all of your financial picture fits together.
- Visualization – Helping you see the potential long-term effects of financial decisions.
- Accountability – Helping you stay on track to meet your financial goals.
- Proactivity – Helping you address issues before they become problems.
- Objectivity – Helping you make hard choices and good decisions.
Hopefully, this episode helps you understand some of these benefits better and inspires you to engage in your financial planning or financial planner. I know many amazing financial planners who deliver these benefits and would love to do so more. Often they find that it is their clients who are not engaging with them and the process.
So engage. Reach out. Learn and get things done.
If you don’t have a good planner, last week’s episode, Five Questions to Ask Your Financial Advisor, is an excellent place to start interviewing potential planners. You can find that episode at RetireMentorship.com/5.
Next week we are covering the Seven Pillars of Financial Victory, the seven things you will need to incorporate into your plan to succeed in your financial life. Subscribe to the podcast so that you will be alerted when it releases.
If you have questions about this topic or any other topic, you can send an email to Questions@RetireMentorship.com. Or you can call us at 1-855-6-MENTOR (663-6867) and leave a voicemail. We will respond to you directly, and if we get the same question repeatedly, we’ll turn it into an episode.
Thanks for listening, and we will see you next week.
This article is educational only and is not intended to be investment, legal, or tax advice or recommendations, whether direct or incidental. Again, this is not investment advice. Consult your financial, tax, and legal professionals for specific advice related to your specific situation. Never take investment advice from someone who doesn’t know you and your specific situation. All opinions expressed in this article are the opinions of the people expressing them. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. RetireMentorship is not affiliated with any Registered Investment Advisor, Broker-Dealer, or other Financial Services Company.
