Financial Planning: What It's NOT And What It IS – Forbes
Iâm noticing an increasing proliferation of proprietary financial services companiesâlike discount brokerage firms and mutual fund familiesâsuggesting that they do âfinancial planningâ or will offer their would-be customers a âfinancial plan.â But then they go on to discuss said âfinancial planâ as a mere review of oneâs investment holdings, as though an investment plan and a financial plan are somehow synonymous. They are not.
If all you get is a portfolio review, thatâs not financial planning.
If all you get is an insurance analysis, thatâs not financial planning.
If all you get is a retirement assessment, thatâs not financial planning.
Each of the above, and a great deal more, are part of financial planning, of course. But to refer to any of these parts as though they represent the whole is both incorrect and misleading.
The whole is greater than the sum of its parts
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The reason itâs important to make this distinction is that without consideration of someoneâs entire financial situation, recommendations regarding specific elements of planning are diluted, at best, if not dubious. This fact is also my greatest defense against one-off cocktail party questions like, âShould I buy Roblox or Bitcoin?â!
So letâs talk about true financial planning, in part and in wholeâwhat itâs NOT, and what it IS:
Investment planningâIs NOT merely the sale of stocks, bonds, mutual funds, and ETFs; it IS determining how all of the assets in your lifeâincluding stocks, bonds, mutual funds, and ETFs, but also real estate, commodities (virtual and otherwise), and entrepreneurial venturesâintersect with life and move you closer to your goals and objectives.
Insurance planningâIs NOT just about buying prescribed insurance products; it IS learning how to manage risk first through risk avoidance, risk reduction, and risk assumption before transferring risk through carefully considered insurance products.
Cash flow/budget planningâIs NOT just for the under-resourced living paycheck-to-paycheck; it IS the engine of every householdâs sound financial plan, just as it is for every successful business.
Tax planningâIs NOT having your tax return prepared or jamming your numbers through and online tax service; it IS planning for the present, but also the mid-term, and the long-term regarding payroll taxes, income tax, capital gains tax, tax deferral, gift tax, inheritance tax, and (if youâre lucky) estate tax.
Education planningâIs NOT sloughing a random chunk of money every month into an education savings plan to assuage your guilt that youâre too busy keeping your own financial house in order to apply much thought to the cost of your childrenâs education; it IS first developing a Family Education Policy (hereâs how much mom and dad are willing to pay and the terms you need to meet to receive that help) and then establishing a deliberate plan to meet those goals, some of which could likely benefit from being invested in a 529 education savings plan.
Retirement planningâIs NOT pounding away at a job you donât love so that you can shelve as much of your income as humanly possible in a 401(k) and IRAs to which youâll look for financial salvation in a retirement that canât come soon enough; it IS, first and foremost, finding a career that you can enjoy indefinitely so that you are always employable (the BEST insurance against running out of income in retirement), and saving effectively for financial independence, while also allocating dollars to enjoying life today and in the mid-term.
Estate planningâIs NOT sleeping through an expensive meeting with an attorney to have documents drafted that you donât understand; it IS examining the impact that youâd like to leave on this earth and implementing tangible plansâthrough wills, powers of attorney, advance directives, and often trustsâdesigned to create a legacy, no matter your age.
Financial planning is a blend of all of these applicable elements, as well as others. It includes investment, insurance, tax, estate, retirement, and cash flow planning, but it is necessarily more than a rifled approach to any one of them. And at the core of the practice is not products, services, or proprietary strategiesâbut you. Your hopes, dreams, fears, concerns, priorities, goals, values, and aspirations are the driving force behind everything. Or, at least, they should be.
As defined by the Certified Financial Planner Board, financial planning is âa collaborative process that helps maximize a clientâs potential for meeting life goals through financial advice that integrates relevant elements of the clientâs personal and financial circumstances.â
Which is to say that the best financial planning is really financial life planning.