We are often asked, “what’s the value of financial planning?” Fair enough question, and similar to others which could be asked in other areas of life: What’s the value of planning a road trip, or the meals for the week? What’s the value of an architectural plan for building or remodeling your home? Phrased this way, the answers are fairly intuitive; most people don’t even bother to list the benefits, they just plan their trip or hire the architect because they know they should. The value of financial planning may be less intuitive, but it can be extremely valuable nonetheless.
You can’t get where you want to go without a plan. If you wanted to drive from Los Angeles to Grand Teton National Park, but didn’t plan that trip in advance, you might not make it. There are too many choices of roads and highways to choose from blindly and too many mountain ranges which can’t be penetrated. You have to look at the map and plan the trip. The financial landscape is similar. A financial plan helps you determine where you are and where you’re going, what situations to avoid, and which financial tools to use to achieve your goals.
Planning helps you blend the emotional with the rational. We are all part emotional creatures and rational creatures. This is a good thing, otherwise life wouldn’t be enjoyable. Pure logic doesn’t produce happiness, and pure emotion often produces disaster. Planning helps you identify and choose from among the various tradeoffs that are necessary in order to blend intellect and heart for a secure financial future you’ll actually enjoy.
The planning process provides a much-needed outside perspective. None of us can know everything about everything. My favorite analogy is carpentry. I can build basic stuff, but I don’t do it enough to build a really nice mantle or bookshelf with molding. I don’t know how to design them or how to fold in the fine details to make them visually appealing. Hiring a carpenter – who does this all day long, every working day – brings in a perspective I can’t possibly have.
A financial planner provides expertise you don’t have. This is a corollary to outside perspective. The financial planner gives you that outside perspective, but the planner also brings an expertise the layman doesn’t have.
Financial planning keeps you educated about your financial future. Do you understand the intricacies of taxes, IRAs, Roths, annuities, life insurance, etc.? Probably not. Developing a financial plan, and then updating it on an appropriate schedule, will help you learn about the benefits, disadvantages and trade-offs of various tools and techniques. You’ll be better informed and better prepared.
The planning process helps you control your risks. Nothing is guaranteed in life, and the best laid plan will still face uncertainties and potential pitfalls. Identifying what might go wrong, insuring yourself properly (but not excessively), and developing a “plan B” will all dramatically increase the likelihood of success.
A financial plan provides accountability. If you take the time to properly develop a plan, complete with the detailed action steps you need to take, that same plan then provides you a measure of accountability. This isn’t a “gotcha” moment; no financial planner should criticize you for mistakes. But the plan allows you to monitor your own actions, to make sure you do what you need to do. This can be as simple as saving the amount you need to save that year, or updating an insurance policy, etc. The plan helps you stay on track.
A financial plan helps you achieve and have confidence in a secure financial future. Assuming you use an objective financial planner (one who doesn’t sell products for a commission), studies have shown that people who develop a financial plan are more successful in achieving their goals and are more confident along the way. Life isn’t always easy, but to the extent possible it should be enjoyed. Planning helps you avoid worry and helps you actually achieve the lifestyle you want.