Whether you’re a do-it-yourself-er or working with a professional financial planner, the real point of financial planning is often obscured in a process so deep and wide that it’s easy to get lost. The most prominent mistake in financial planning is to allow the process to be reduced to an exercise in which success is solely derived from a single number—your net worth, today and projected into the future. In truth, the real point of good financial planning isn’t to have more money, but a better life.
One may argue this point suggesting that more money is simply more…better, that few financial plans have suffered from a surplus of financial resources. This is true at a moment in time, but the problem with making “the number” the ultimate goal of a financial plan is that it steers behavior to get there. But that is the point, many of my esteemed colleagues may insist, that we subordinate our todays to our tomorrows in hopes of securing comfort and prosperity in both. Then I ask you this:
Is comfort and prosperity the chief end of life?
I’m privileged to teach the Fundamentals of Financial Planning at my alma mater, Towson University, and every semester I pepper the class on the first day with a barrage of questions, among them, “How many of you are HERE because you WANT to be here?” The average positive response is 10% of the class. Most of them are accounting majors, so I engage them in discussion to determine WHY they chose that course of study. The primary reason given is to secure comfort and financial prosperity in life.
“So you’ve chosen,” I ask, “to dedicate four-to-six years of your life becoming educated sufficiently to spend the bulk of your waking adult hours thereafter in a job you don’t particularly love to hopefully secure financial prosperity?”
Unfortunately, too many financial planning processes look just like this. They begin with numbers and back into the actions—and life—necessary to achieve those numbers. Planners may justify this by disclaiming that the client dictated the data (in the questionnaire designed to force the client into a box that can be managed by the planning software du jour). The recommendation is simply the output. But that’s because the process is backward.
It should start, instead, with three simple questions:
- WHO are you?
- WHAT do you want to be about?
- And, WHY?
Then and only then should the numbers come into play. And the numbers shouldn’t exist to extinguish the who, what and why, but to support them. If I’m really a good teacher, I may have to recommend you consider an alternative educational or vocational path. If I’m really a good planner, I may have to recommend a course of action that could have a negative impact on your bottom line—today and in the future—but which leads to a better, more fulfilling life.
At best, the benefit of financial planning is minimized when reduced solely to a process intended to give you more money, today and in the future. At the very worst, such a process could temporarily or permanently derail your entire plan for life.
Your financial plan must submit to your plan for life.
In the coming weeks, I’m going to take you on a blog journey through an entire financial plan, including an examination of topics you’d expect—like how to judge your investments and determine how much life insurance you should have—as well as many you might not anticipate—like how to create your own Personal Money Story and articulate your Personal Principles. We’ll discuss everything from homeowner’s and disability income insurance to navigating death and taxes.
Each week’s blog post will be on a different topic, building on the last, and will include online exercises you can download (at no cost) for your own personal use in developing your financial plan. It’s not designed to supplant the intangible benefits of a personal financial planner, but to be a starting point, a supplement and/or a second opinion. And throughout, we’ll work to maintain the real point of financial planning—a better life.