Planning for your finances is not something to be ignored, but why? And what does that look like? In this article we will outline why financial planning is important, what happens when planning is ignored, and what happens when planning is done well.
Why is financial planning so important?
Having a financial plan is not only important for the practical ways it can improve one’s life, but also because it can provide a better quality of life for an individual and their loved ones. A financial plan provides peace of mind around finances which reduces stress and anxiety. A plan that orders one’s financial life can bring proper perspective and allow a person more freedom to spend their time and energy on other things they enjoy. When stress about finances is reduced, a person can enjoy life more and be more present and enjoyable to be around.
Another significant thing to keep in mind when considering the importance of a financial plan is the people it impacts. Having a plan that helps build wealth and attain some level of economic security impacts the person planning, but beyond that it has a large impact upon those around them.
For example, children are directly impacted by the state of their parent’s finances - how they are educated, how much debt they carry into adulthood, etc. Parents are another example – a child’s ability to help them with their needs as they age. Beyond family, community can be affected by how someone manages their money – a person’s ability to give to the organizations and causes that they care about is greatly impacted by a financial plan. Lastly and most importantly, spouses are usually central in a plan and will be affected directly. So, it is not just about individuals. The importance of a plan extends to all those people and organizations people care most about.
What does it look like if financial planning is ignored?
A great way to illustrate the importance of a financial plan is through looking at how a financial plan, or lack of a plan, can impact someone’s life.
Several years ago, Louis Homes, a LongView Planning Partners advisor, met physician and his wife who were nearing retirement to discuss the financial planning process. They agreed to pursue planning and were meeting to review their current situation (goals, objectives, income, assets etc.). After listening to the couple share their goals and dreams around retirement, Louis asked what savings and retirement investments they had already accumulated. At this time, the man grew very quiet. As Louis looked across the table, he could see tears forming in the man’s eyes as he began to weep. The client shared with Louis and his wife, “saving for retirement was always something he was going to do next, but it never happened. There was always some other financial commitment that got in the way”.
It is imperative to understand how not slowing down long enough to prioritize and plan for your future can drastically affect your life and the lives of your loved ones.
In the medical professional market, we encounter people who think they are in good shape because they are maxing out their 401k plan every year. Let’s say they make $500,000 annually and take home $30,000 monthly, after taxes. They contribute $1,700 a month to their 401k. The rest of their income is spent on their lifestyle expenses (lifestyle, house, cars, second home, etc), and they expect their 401k plan to take care of them one day in retirement. The amount of savings in some cases may not be enough of a nest egg for certain client's lifestyles over their retirement. The bottom line is that a lot of people are under-saving and don’t know it.
People live in a tug of war between enjoying today and saving for tomorrow. We have to find our balance in that tension. If one focuses too much on enjoying today and forgets about the future, they can end up like this doctor in the first example. But there are people on the other side of the spectrum as well. They are so anxious and scared about the future they become hyper-focused on saving and don’t allow themselves or those around them to enjoy today. It is all about finding that balance, and financial planning is a great tool to use to bring that balance into fruition.
What does it look like if it is done well?
The success of a person’s plan can be measured by the achievement of their specific goals. In that way, success may not be achieving a specific rate of return on your investment assets but rather achieving a desired outcome; for example, retiring at a specific age at a targeted income level. In most cases client’s goals are focused in three different areas: accumulation, security, and legacy. So, a plan well done will have successfully addressed all three.
Most clients want to accumulate enough wealth to educate their children and retire. Examples of accumulation goals include the following items:
- At target retirement age, they can live their desired lifestyle with confidence knowing they will never outlive their financial resources – despite rising inflation and taxes.
- The ability to educate children (and grandchildren), at the institution of their choice without the ongoing burden of student loan debt.
Financial security goals typically focus on peace of mind and protection. Examples of goals relating to financial security include the following items:
- Financial lifestyle will not change due to death or disability. Family will be able to stay in their home and retirement and education plans will stay on track.
- A plan that allows the ability to support family members in a meaningful way without taking their financial plan off track.
- Lastly, legacy goals are more about making a current and future impact on the people or organizations they care about. An example of a legacy goal is:
- Even while sustaining a retirement lifestyle, our investment assets will continue to grow over time, allowing us to cheerfully give to the charities and community organizations we care about while also funding meaningful legacies to our succeeding generations.
Planning successfully is about achieving the goals one desired. With this, keep in mind - In planning one can’t lose sight of the bigger picture.
Financial planning is not just about becoming wealthy or managing wealth to become wealthier. Financial planning improves the life of the person planning by allowing them to reduce their stress around their financial lives while also providing security for their loved ones. When done well, financial planning empowers people to have the tools to live the life they desire. Financial planning is about finding some level of balance where you can enjoy today, while also having confidence in your tomorrow.
To learn more about this topic, check out our podcast episode "A Complete Financial Plan"
These are the views of LongView Planning Partners and not those of MML Investors Services, LLC or its affiliated companies, and should not be construed as investment advice. Neither the named Representative nor MML Investors Services, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, MML Investors Services, LLC makes no representation as to its completeness or accuracy. The author is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.
Securities and investment advisory services offered through registered representatives of MML Investors Services, LLC, Member SIPC. 5100 Poplar Avenue, Suite 2300, Memphis, TN 38137 (901) 748-8888. Longview Planning Partners is not a subsidiary of MML Investors Services, or its affiliated companies. MML Investors Services, LLC does not provide tax planning services. CRN202508-2774709