This column usually leans toward investment selection, bond- and stock-market gyrations, economic news, historical data, and political winds. But that is the easy stuff!
Financial planning is a far more complex topic because implementation failure occurs often: The plan is drawn up but not executed. For example, there are numerous stories about dead or estranged relatives named as inheritance beneficiaries or families paying far more in taxes than they needed to because they paid careful attention to tax compliance (filing with the Internal Revenue Service) but never pulled the trigger on tax planning (which is totally different from having an accounting team meet your compliance deadlines).
This column has many audiences, and the goal is to educate and elevate each. So, for today, I will explain the key elements of an effective financial plan. I will give two supplemental definitions, each inspired by two experts.
A podcast for financial planners, “Model FA,” shares that there are five things a great financial plan strives for:
- For every dollar you make, you should keep as much of that dollar as legally possible. You should not pay unnecessary taxes. The CPA’s job is to file taxes after the end of the year; your financial plan reduces your tax obligation before it is time to file.
- With what is left over of that dollar, a financial plan designs a strategy to grow it.
- A plan protects the value of that dollar as it grows. That could mean getting more defensive in your portfolio before a significant market pullback. It could also mean exploring the best insurance options that might cover long-term care or disability.
- A financial plan creates what I call your “paycheck replacement” program: a strategy to help you avoid running out of dollars in retirement.
- If you die with a bunch of money, a plan directs who receives it in the way that you want, with as much tax avoidance as legally possible.
Mitch Anthony, a leader in financial life planning, identifies six essential services a financial plan provides: education, partnership, objectivity, organization, proactivity, and accountability.
1. Education
Educated investors do not rely on gut feelings; they make decisions based on how their choices affect their long-term goals. A financial plan provides investors with the knowledge to make intelligent, goal-oriented decisions rather than reacting emotionally to market movements.
Imagine two people, Jane and Jim, each with a $10 million portfolio. Jane feels she has more than enough and wants to take some risks, hoping for a more significant return. She fears missing out on potential gains—a feeling often referred to as FOMO (fear of missing out). On the other hand, Jim is content with a modest return and worries about losing what he has earned.
Neither Jane nor Jim has a solid rationale for their feelings. Jane wants growth for the sake of growth, while Jim sticks to the status quo out of fear. Both could benefit from financial education to make more informed decisions. A financial plan helps investors understand that investment choices should align with specific life goals. How much risk you take should not only reflect your comfort level but also your aspirations.
For example, investors often believe they must take big risks to achieve their goals. After reviewing their financial plan, however, many are surprised to learn they can meet their goals with less risk. An investor might feel comfortable losing 20 percent in a market downturn; however, when they realize that could mean a $2 million loss, they reconsider their risk tolerance.
2. Partnership
As referred to earlier, many readers of this column are do-it-yourselfers. And I get it. Many people practice self-care, do their own gardening, and fix their own cars. Others delegate. There are advantages and disadvantages to everything, I suppose.
Delegating the process often allows people to engage in deeper conversations about their lives, hopes, and fears. These discussions build a level of trust in the plan that goes beyond numbers. These conversations often touch on emotional topics, sometimes making experienced planners feel more like partners or even therapists.
Partnership means going beyond the immediate concerns to understand what is truly important to the investors—“investors” plural. It often turns out that when a couple is planning, one person takes over. The other may be a “people pleaser” who defers to the goals of the one putting pen to paper. You would be amazed by how frequently couples just go along with each other because they don’t feel they have the opportunity to speak up. By developing a deep understanding of their values, planners help make decisions aligning with both parties’ financial and personal goals.
3. Objectivity
Emotions can cloud financial decisions, especially during market highs and lows. Fear and greed often drive investors to make impulsive choices—like buying when prices are high and selling when they fall, a strategy that can ruin a portfolio. Plans guide people to step back, take a deep breath, and make objective decisions based on facts, not feelings.
For example, a couple may have an emotional attachment to their family home, even though downsizing would be the wiser financial decision. A financial plan presents the facts, helping them see how selling the home might benefit their financial future. While emotions matter, a plan ensures that decisions are grounded in reality.
The plan’s role extends beyond investments. Whether deciding how to manage debt, plan for taxes, or allocate an inheritance, objectivity helps people make choices that are in their best interest.
4. Organization
Good organization is key to a successful financial plan. With so many elements—investments, insurance, estate planning, taxes—keeping everything in order is crucial. A plan helps investors pull together all the necessary information to provide a clear picture of their current financial situation.
In today’s digital age, securely storing and accessing financial information in a portal is easier than ever. Yet many people still use disorganized and nonsecure systems, like folders on their computers. A good plan helps families set up digital filing systems that are secure and easy to manage.
Planning for the unexpected is also part of staying organized. For instance, what happens to your digital accounts if you pass away? Who has access to your passwords? A plan ensures these details are worked out in advance, reducing stress during difficult times. Business owners, in particular, need a plan for who will take over the company’s finances if something happens to them. A well-organized financial plan makes handling such transitions smoother.
5. Proactivity
One of a financial plan’s most valuable elements is its focus on proactive advice. Those new to planning often don’t know what questions to ask, but a good planner anticipates needs before issues arise. By understanding the investors’ long-term goals, the plan can identify potential problems and offer solutions in advance.
For example, suppose someone is considering selling a property. In that case, a financial plan should already have tax strategies prepared before they even begin thinking hard about it. Similarly, a plan may suggest changes to insurance contracts to save money or reduce unnecessary coverage. People often appreciate these proactive insights, which help them avoid costly mistakes or missed opportunities.
Proactivity extends to preparing families for significant life events, such as marriage or retirement. Plans help people prepare for these transitions well in advance and provide peace of mind that no detail is overlooked.
6. Accountability
A financial plan is only as good as its execution. While it is easy to talk about goals, real progress requires action. Following the letter of the plan, or using a planner to carry you through it, keeps people accountable for the steps needed to achieve the stated goals.
For example, a plan might remind a 30-year-old to contribute regularly to an investment account. With an older person, accountability might involve ensuring estate plans are updated or tax-saving strategies are implemented. A good planner won’t just make recommendations; they follow up to ensure the work gets done.
This ongoing review process is crucial. You should regularly adjust the plan as life changes. Push yourself to act and stay on track toward your goals when necessary. Without accountability, even the best financial plan can fall apart.
Effective financial planning is about more than just numbers; it is about acting now to benefit later. And it is certainly more than just investments.
Allen Harris is an owner of Berkshire Money Management in Great Barrington and Dalton, managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.
