A lot of people seem to believe that financial planning is only for the wealthy, or for the people who are a financial train wreck.
That might be partially true…before I left my last broker-dealer, I saw how much pressure advisors were under to only take on clients who met certain asset 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! Or maybe a lot of it is sitting in their 401ks or it’s all going into a home down payment.
Fundamentally, financial planning is making the best use of every dollar coming in and going out of your household. Most people who engage in financial planning are out of “survival” mode and are really looking for, what’s next? What is the next opportunity to take your finances to the next level?
Six areas of financial planning
Financial planning can be super helpful for anyone, in a lot of different areas of finance. In fact, there are six areas:
- Financial Foundation. This includes building a cash reserve, understanding your cash flow and debt. Some people think this is boring, but this area shows me immediately how financially successful a person will be.
- 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 don’t prepare taxes, but we can chat about strategies for tax savings and make sure there are no tax surprises.
- Estate Planning. Planners can’t give legal advice, like how to draw up your will, but we’re usually the ones who get 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 buying a home and wants to put down a huge down payment…but forgets that they might need some of that money for renovations and settling in. Maybe someone is focused on paying down debt, but they forget 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, 20, or 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 qualifying tests (and then one major one) to get the certification. And, the CFP® board requires continuing education to maintain the certification as well as acts as an ethical oversight group for everyone who has earned the certification. They started implementing more fiduciary standards, ahead of the governmental regulatory agencies. 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, investment advice has 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 issues you have can simply be solved by buying a product. Nope.
Do I need a financial planner?
I think the perfect way for you to decide if you need financial planning is to look at these six areas of financial planning and ask yourself, what clarity do I need in these areas to know whether or not I am on track?
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.