Why You Need A Financial Plan

31%

That's the percentage of American households that have a financial plan according to the CFP Board.

We can interpret this number as either pathetic or spot on. Perhaps both. Let's face it- it's easy to put off the intangible that is tomorrow.

Financial planning is at the core of what my company, Aspen Leaf Partners does. It's why most new clients hire us. I believe investments are important part of the financial conversation, but they are really a means to an end. That end, is whether or not you're on track to reach your financial goals.

The rest of this post will be to define what a financial plan actually is, with some examples the majority of readers should be able to relate to.

A Formal Plan Contains 6 Components. Cash Management (savings, budgeting, emergency funding, and education funding), Insurance, Investments, Tax Planning, Retirement Planning, and Estate Planning. Many times a financial planner will defer some of the tax and estate planning work to the most qualified folks (planners are not attorneys).

Getting organized in all six areas is somewhat time consuming. Some people might feel frightened they'll mess up or miss something. Many people think they just don't have the expertise to dig deep into each area. For these reasons, I don't blame folks for ignoring their finances. I get it. I ignore important things all the time. I have all I can do to make it into a dentist's office once a year!

Get Organized And Feel Your Financial Stress Melt Away.

When I onboard new clients, I ask them questions about their financial situation. After we discuss their goals and why those goals are important, we discuss their current strategies.

This is pretty typical of what I hear: I have a will, but I'm not sure I created it before or after I relocated to Colorado. In fact, I'm not positive what it even says. There are a few life insurance policies in one of my cabinets. I think one of them has investments in it. I'm not sure what I pay for these things. I haven't enrolled in my company's group disability because I wasn't sure how it worked. Don't worry though, my 401(k) is diversified.

That last one always cracks me up. Usually they have 4 different large cap funds, all managed (very proudly they always tell me) by different mutual fund companies.

Disorganization Costs You Money. It's hard to know how to fix it though. What workplace benefits make sense to enroll in? Should you try to beat the market with active management (market timing and individual stock selection) or should you buy the entire market with an index fund? Is it better to save for retirement or pay down your mortgage at an accelerated rate? Does moving money into a Roth IRA make sense?

Maybe just stick your head in the sand? No, don't do that. Hire someone who helps folks answer these types of questions!

8 Hours Per Year. That's one regular work day. That's all the cumulative time you'll need to review professional recommendations and take action. One of my colleagues even simplifies everything to a One Page Financial Plan! If you spread out some of organizational work that comes with a financial plan, the process becomes less daunting.

However and whenever you put your plan into action, you'll replace the anxiety that comes with disorganization with peace of mind. The net effect is an incredibly valuable sense of well-being and self confidence. Walk tall, you have a game plan!

Need More Proof A Plan Will Help? Maybe you don't need one? Perhaps you're one of the few (I'm never actually met one, I just assume they exist somewhere...) that can easily and competently answer the following questions:

• Have you written down and prioritized your goals and values?

These can't be fluffy like "I want to retire". They need to be specific; at what ages will you and / or your spouse retire, how much money will you need for basic living expense, how much fun money will you need, how long does that money need to last?

• Do you know how much you should be saving each month towards each of your goals?

Not only should you have a clear idea of how much to be saving, you should understand what types of accounts make the most sense for your savings (Roth IRA, 401(k), Deferred Comp, etc). You should also have clarity around how much risk you should take in the investment accounts earmarked for your different goals.

• Are you confident you know how much and what types of insurance are best suited for your needs?

Cash value or term life insurance? 250k or 1M in death benefit? Can your non retirement assets support your financial plan if you get sick and can't work or should you purchase disability insurance? What's the likelihood you'll need long term care services? How are you going to pay for that? Are you getting the best deal on your auto and homeowners policies?

• If you can't make a decision for yourself, do your legal docs support your intentions?

​When you stop breathing, will your assets be distributed the way you want or will a probate court make that decision for you? If find yourself in an end of life situation at the hospital, what treatments do you approve of and which would you prefer to avoid? Who are the beneficiaries on all your bank and investment accounts?

There are so many other considerations it's impossible to cover them all in a blog. These are a good start however.

Here's What To Expect In A Financial Plan. First, there should be an analysis detailing current vs. recommended progress towards your goals. The summary page might look like this:

There should also be an asset allocation assessment. It's important for the planner to understand your current investment design so it can be compared to a recommended allocation. The goal here is to maximize expected return for the least amount of expected risk (never crossing your risk threshold of course).

With retired clients who may fear running out of money, it's important to project a financial asset's ability to generate income.

In addition, expect to find various analysis covering insurance, tax reduction strategies, as well as how much cash to keep in the bank.

For Many People, Retirement Is A Huge, Dangerous Transition. Having an ally on your side helping you make the most of your prep years as well as ensuring you don't have to eat cat food when your 85 is priceless counseling. Well, don't pay too much for a plan (needless spending can harm your financial goal).

Beyond the numbers, a good plan and (especially) a good planner can help educate you about esoteric financial issues, ones rarely taught in school. Commitment, discipline, and the behavioral fortitude to stay invested during tough times come to mind.

So when are you going to hire a planner and get organized?