There is a popular adage often attributed to Benjamin Franklin, the father of time management, “Failing to plan is planning to fail.”
I think a lot of people believe that financial planning is only for the wealthy — which may be true, but only for a lot of financial planners. Before I left my last broker dealer, I saw how much pressure advisors were under to only take on clients who met certain minimums. In many firms, you need to be bringing a minimum of $250,000 of assets to invest in order for them to take you on (or take you seriously).
That, to me, is bordering on criminal. Many times the people who most need some financial advice are those who haven’t made their fortune yet!
6 areas of financial planning
The fact is, financial planning can be super helpful for anyone, in a lot of different areas of finance. In fact, there are 6 areas:
- Financial Foundation — This includes building a cash reserve, understanding your cash flow and debt.
- Risk Management — Just a fancy name for insurance needs. (Hint: You need insurance to cover anything you couldn’t easily replace if it disappeared tomorrow — including you.)
- Goal Planning — Do you want to save for a big financial thing, like a home, retirement, college? Gotta make a plan.
- Investment Planning — Essentially what money to put where to get the best bang for your buck in the long term while reducing volatility for the money you need right now.
- Tax Planning — Most planners aren’t tax preparers, but we can chat about strategies for tax savings. It’s OK for Uncle Sam to take his fair share, but no more than that!
- Estate Planning — Planners can’t give legal advice, like how to draw up your will, but we’re usually the one who gets the “what if I die” conversation going.
It’s all connected
The biggest mistake I see people make is that they don’t look at all of these areas as being connected.
Maybe someone is focused on paying down debt, but they are forgetting they need to set aside money for that big wedding they are in six months from now. Or someone is contributing to 401k savings… but they don’t know what those savings actually translate to, 10–30 years from now, or whether they’re saving enough.
And while we’re at it, let’s clear up some other major misconceptions:
- “Financial planning is ‘just’ for retirement.” You can clearly see, it’s not. Most of the financial planning I see has to do with how to juggle short term cash flow needs with goals coming up in the next 3–5 years (buying a home, funding a wedding, having kids, etc.).
- “The CFPⓇ is the only standard.” I think my CFPⓇ (Certified Financial PlannerⓇ practitioner) is valuable because you seriously have to slog through (and pass) several tests to get the certification. And, the CFPⓇ board required continuing education to maintain the certification as well as acts as an ethical oversight group for everyone who has earned the certification. However…I have met plenty of people without CFPⓇs who have tons of experience (and are ethical). So the CFPⓇ should just be one filter of several when selecting your financial professional.
- “Financial planning is ‘just’ about investments.” This might be just me, but I have no interest in investments until I understand a client’s bigger picture and long term vision. Until I understand those, investments have no meaning.
- “Financial planning is ‘just’ about products.” Because it’s so common for financial professionals to sell mutual funds, insurance, mortgages and other financial products, people start to think that any financial issue you have can simply be solved by buying a product. Nope.
Do I need a financial planner?
I think the perfect way for a person to decide if they need financial planning is to look at these 6 areas of financial planning and ask yourself, what clarity do I need in these areas to know whether or not I am on track?
That’s why I designed this Financial Clarity Worksheet, which you can click here to download for free. It walks you through a few easy questions in each of the six areas of financial planning.
And if you find that you’d like to get some help, information, or clarity in any of the six areas — or with how they fit together to make a complete financial picture for you — then meeting with a financial planner might be a great idea for you.