What Exactly is Financial Planning?
When you go to the car dealer to buy a car, you almost inevitably drive away with a big tangible reminder of what you just exchanged a lump sum of money for. Same thing when you go to the mall, get a haircut, buy groceries, the list goes on. Whatever it is, there is a tangible reminder of exactly what you purchased with your hard earned money. Heck, even when you go to the dentist you usually walk away with a new toothbrush, a mini thing of toothpaste and if you’re really lucky, a jaw that you can’t feel.
Unfortunately when it comes to financial planning the proverbial car usually doesn’t exist. Most young professionals that engage a financial planner don’t walk out of the advisor’s office with anything other than a few pieces of paper. There is, in fact, nothing you can see, touch or feel when it comes to financial planning.
That, however, doesn’t mean there isn’t value to financial planning—especially for young professionals.
Defining Financial Planning
Wikipedia defines financial planning with sleep-inducing excitement as “a comprehensive evaluation of an individual’s current pay and future financial state by using current known variables to predict future income, asset values and withdrawal plans.” This definition while technically correct is almost unbearable to read—even for a financial planner!
At Lifewise, we define financial planning more simply. It is the orderly process of creating a plan to deal with life’s inherent tradeoffs in an effort to maximize happiness. Notice there is no mention of retirement, insurance, investments or tax. Financial planning is not about picking the right stocks or bonds. Rather it’s about recognizing that in life we have two primary finite resources—time and money—and determining how to best maximize them is the ultimate goal.
It is the orderly process of creating a plan to deal with life’s inherent tradeoffs in an effort to maximize happiness.
The financial planning process is about first defining what it is in life that we value. Is it travel? Is it time with family and friends? Is it things or experiences? What is it that is truly valuable to us? In fact, any financial planning process that doesn’t start first with defining what’s important is missing the mark entirely. Clearly articulating what it is that is important creates a lens to evaluate all future financial decisions.
Life is Full of Endless Tradeoffs
No matter how hard we try to stretch a dollar by budgeting, saving, and investing properly, money will always remain finite. With finite resources comes difficult decisions around how to best align our money with what we hope to get out of life and what we value most in it.
Take a simple example. A young couple is adamant about sending their son to college. They both were riddled with student loans. Now, however, they find themselves advancing in their careers as young professionals with aspirations of covering their son’s full college tuition. The couple has also long aspired to buy a cabin that can host family gatherings and be a place of respite for their busy lives.
They’ve calculated that they need to save roughly $750/month to cover the cost of tuition for their newborn son. They’ve also estimated that a second mortgage payment will be roughly $800 for a small cabin up north. They can only afford an additional $1,000 month in expenses, while still maintaining their same lifestyle and continuing to fund their retirement accounts adequately.
What do they do?
Financial Planning is Both Art and Science
The young couple’s dilemma is a perfect example of the art and science of financial planning. In a perfect world, the couple would have $1,550 of extra cash each month and could afford to both fund college and buy the cabin. Unfortunately we don’t live in a perfect world and this is where planning becomes more art, less science.
Take another example. A common question we get from young professionals is, “Should I pay off my student loans as fast as I can and then start saving for retirement or should I balance both saving for retirement and paying off the minimum amount on my student loans?” The answer to that question can be answered scientifically with some level of mathematical certainty. If the interest rate on the loan is low—say 5% or lower—then mathematically it makes sense to pay the minimum and save for retirement as much as possible.
The science says pay the minimum and save as much as you can for retirement, however, this individual saw their parent’s retirement crippled by excessive debt and has personally had issues with credit card debt in the past. He, in short, hates debt and would prefer to avoid it as much as possible. Enter the art of financial planning. This situation involves tradeoffs based largely on personal preference, comfort, and background. The financial planning process is designed to uncover these preferences, to understand that background perspective and to create a plan that will balance both the science, art and complexity of people’s financial lives.
Financial Planning is a Means to an End
Nobody wakes up in the morning craving financial planning. As much as financial planners would love to compete with the morning craving for McDonald’s breakfast or Saturday morning cartoons, we never will. And that’s okay. Financial planning is not the end, but rather a means to an end and this is precisely why the art of financial planning matters.
Read More: How an Advisor Can Help: Time, Interest, and Expertise
If financial planning—and life—was just a big game about maximizing every penny spent with complete disregard for the tradeoffs that might occur because of that mindset then financial planning would simply require a couple button clicks. An algorithm would spit out exactly what young professionals should do.
It is after all not just about maximizing money. Rather it’s about generating the highest Return on Life or ROL. This is why, even if the science says to pay the minimum on the debt, if the art says if that will cause unavoidable stress, then it’s okay to pay off the debt as quickly as possible. A good financial planner helps individuals weigh the pros and cons of every financial decision clearly, yet succinctly.
This allows the debt-adverse young professional to make a calculated, values-based and ROL maximizing decision around why it makes sense for him to pay off the loans as quickly as possible. He understands that he might be ultimately delaying his retirement by not getting started saving as early as he should, but that’s okay because it’s helping to eliminate stress in the here and now.
The Value of Financial Planning
Financial planning—and more importantly a good financial planner—does not make difficult choices surrounding the many tradeoffs in life go away. Rather the process helps to provide a framework for answering those difficult questions and navigating the financial complexity that oftentimes comes with those decisions—and ultimately the implications of those decisions.
Unfortunately the value of financial planning will never be as tangible as the car that you can touch, feel, and even smell. The confidence that can come with going through a systematic process of evaluating what’s important, determining where you want to go in life, then building a plan to navigate the complexities of a young professional’s financial life to get there, is invaluable. Ultimately financial planning is a means to arriving at an end—your best life—while providing peace of mind and confidence along the way.
As the financial planning industry evolves, researchers have increasingly attempted to quantify a precise value of professional financial advice and guidance from a scientific standpoint. To read more on this click here and here.
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Providing the perfect blend of powerful technology and human guidance, Lifewise is geared toward young professionals searching for a better way to make wise choices and sound financial decisions. Backed by BerganKDV Wealth Management, Lifewise is supported by a team of CPAs, CFPs and CFAs who stand ready to guide you through every financial challenge and windfall.
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