The more technology advances, the more demanding it seems users become. The hourglass icon on the computer, or the voice announcing the GPS system is rerouting, have become irritants that seem to have only further heightened the desire and need for instant information.
In a recent D.A. Davidson study of over 1,000 affluent American investors, researchers found that 47% of respondents did not have a written financial plan. While it's unlikely that any of the respondents would plan a trip without an itemized itinerary, it is surprising that this same group navigates their lifelong financial journey without a written road map.
Today, many people use apps that help
optimize our travel, yet many don't
realize that this same navigational
power is available to help map our
financial journey – and it's called a
written financial plan.
Some may only see the importance
of a financial plan when thinking about
retirement, which can often be a long
way off. In fact, the response from
clients often heard is, "Help me invest
and grow my savings now and we can work on a plan later when I get closer to my
While on the surface, this argument may seem logical, it doesn't ensure that one will achieve long-term financial success. Only by laying out a specific plan, which incorporates the desired short- and long-term goals, can one proactively track whether they are actually on course.
Here are five reasons why financial plans matter:
Financial plans measure your progress
Financial plans force you to clarify inputs and goals.
Financial plans inform an overall investment allocation consistent with these inputs
Financial plans provide a forecast to track progress.
Financial plans can assist in protecting your assets.
Financial plans can keep philanthropy and/or succession planning on track.
Financial plans clarify inputs and goals
A written financial plan begins with basic assumptions about current assets, liabilities and future income streams. An updated consolidated snapshot is a useful exercise in determining not just whether savings or debt are increasing, but also whether short- or long-term goals are changing.
For example, when a child is born or an ailing family member requires financial assistance, these might change the road map goals. Only through a regular "refresh" of this information can a saver have confidence that their plan accurately reflects the right inputs and goals.
Financial plans are also valuable for identifying key savings goals like funding education for one's children, planning for periodic car replacements, building up an emergency reserve or saving for unexpected medical needs.
Rather than just assuming you'll pay for those things out of cash flow, a regularly reviewed comprehensive plan can become an indispensable roadmap for anticipating those items and creating a proactive funding plan.
Financial plans help you allocate assets
Once accounts, assets and goals are identified, coupling those realities with an assessment of one's risk tolerance and time horizon helps to inform an appropriate asset allocation for the plan.
Identifying how much risk one can stomach to achieve their desired results is both science and art.
The "science" is largely formulaic using savings amounts, estimated growth rates, time and future contributions/withdrawals to calculate how much is needed to successfully fund the desired goals.
The "art" portion stems from a clear recognition that all investors have a different tolerance for risk. An inappropriate allocation could cause a nervous saver to get in or out of their investments at precisely the wrong time, thereby sabotaging their plan.
Finding the correct balance between the need to take risk, and ability to stomach it, is a careful dimension of behavioral economics that is critical for plan success. It would be far better to reset expectations about future goals early in the savings process than to simply chart a risky course and hope the investor holds on through the inevitable turbulence.
Financial plans offer protection
Another benefit of a written financial plan is that it draws a proverbial "line in the sand" of expectations about the future such as growth of assets, increases in salary income and decreases of debt.
While the plan includes informed estimates only, it also creates an objective tool to measure progress (or regress) over time. Did you assume too low of a growth rate? Did you anticipate a faster payoff of the mortgage than you could actually manage? Did you plan ahead for an emergency reserve to cover unexpected home repairs? Were you anticipating an athletic scholarship which now may not come to pass?
Having an annual report card of progress to the plan helps avoid arriving on the doorstep to retirement only to find you hadn't planned sufficiently.
Comprehensive financial plans also serve an important role in helping mitigate risks to one's financial goals. Accidents happen and health outlooks can change. In the same way that companies annually review and update coverage for themselves and their employees, so should individuals and families.
Long-term illnesses and/or inappropriate levels of personal insurance coverage can potentially derail the goals of even robust nest eggs. Further, new potential threats to a family's finances emerge, like cyber crime, which require regular review to gauge the potential impact and/or need for additional coverage.
Annual updates to a written financial plan provide a regular review opportunity to ensure necessary protections are accounted for.
Financial plans help you leave a legacy
Finally, many financial plans are not just constructed to take care of the savers' needs during retirement, but also with the intention of leaving a legacy to children, charities
A well-drafted financial plan can incorporate these posthumous goals while ensuring that they're transitioned in the appropriate title, trust or estate instrument to maximize
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