Not Having A Plan Is A Costly Mistake
Your deadlines at work are impossibly tight. Your to-do list gets longer every time you turn around. And with constantly shuttling the kids to Little League and piano lessons, it’s no wonder your financial life gets short shrift. Yet, however good your excuse, failing to plan your financial future is a costly mistake.
Most Americans lack a formal financial plan, according to a recent survey by the Certified Financial Planner Board of Standards. Yet the same survey finds those with a written financial plan are more satisfied with how their finances are managed, more confident about their financial decisions, and less worried about being financially secure at retirement.
Financial planning doesn’t start with deciding where to invest your money, and those who arrive at the door of a financial planner asking “Where should I invest?” are likely to be greeted with two words: “Slow down.” You need to step back, assess your current financial situation, identify short- and long-term goals and your risk tolerance, and figure out your timetable—what will you need, and when will you need it?
You also need to consider asset protection—though again, don’t rush to buy insurance until your financial plan is in place. It can help you decide what coverage you really need, and which options and riders make sense. Beyond pointing to the obvious homeowners and automobile coverage, your plan will guide you to the right life, health, umbrella liability, and disability policies and look at any unique liabilities associated with your work or your participation in community activities or corporate boards.
By presenting a broad view, your financial plan helps you understand how each financial decision affects other areas of your finances. For example, suppose you receive an inheritance and use it to pay off your mortgage. That frees up more of your earnings to put into your retirement plan. But your taxes rise because you’ve lost your mortgage interest deduction, and your expanding net worth means estate taxes could become a problem. Like a compass, your financial plan keeps you pointed in the right direction even as your life inevitably changes. What’s more, the comprehensive nature of financial planning should help you avoid major mistakes—from choosing a high-flying mutual fund with no regard for its risk to overestimating how much you can safely withdraw from your nest egg.
Developing a plan takes time, but often, simply articulating your values, hopes, and dreams can increase your motivation to save. Your plan also enables you to chart your progress. Review and regularly revise it as needed, and it will be a road map that can last a lifetime.
The sooner you get on the planning road, the better. As Yogi Berra once said, “If you don’t know where you are going, chances are you will end up somewhere else.”
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