Written by: Corey Janoff
October is National Financial Planning Month, so it's fitting we write about the benefits of financial planning! Many of you reading this are existing Finity Group clients and therefore understand the importance of financial planning and working with a financial advisor. Others hof you have attended our financial planning webinars or in-person seminars (back when those were legal). Click the link in the previous sentence to see a list of our upcoming webinars on financial planning for physicians and other medical professionals. Some of you also listen to our Financial Clarity for Doctors podcast. Absorbing all of these resources puts you well ahead of your peers regarding financial education and financial planning. However, it doesn't hurt to reiterate these benefits and why you're making smart financial decisions!
What is Financial Planning?
I define financial planning as the ongoing practice of creating and updating a strategy to achieve your goals. It's not a one-time thing. It's a continuous habit or routine. No different than regular car maintenance or dental care. Have periodic checkups with regular care in between.
It's a never-ending process because life is ever-changing. Your hopes, dreams, and goals in your 20's may evolve and be considerably different in your 30's, 40's, 50's, 60's, etc. It's vital to assess things from time to time to ensure you're on track to achieving your goals and make necessary adjustments along the way.
It's also helpful to know what goals are realistically obtainable and which ones are out of reach. Without going through a financial planning process, you may not know what is or isn't possible for you.
Why Do Financial Planning?
The answer to this question is quite simple. If you want to achieve your financial goals, having a plan to achieve them will likely increase the odds of success. However, broad or detailed, having a financial strategy can increase your confidence in your finances, which can provide a multitude of benefits beyond dollars and cents. If you don't believe me, listen to our podcast episode about avoiding burnout with The Physician Philosopher. Dr. Jimmy Turner discusses how getting his finances in order and having a plan to achieve his goals has helped immensely with stress and overall wellbeing.
I love sports and fitness analogies because they are pretty easy for most people to relate to and understand. For example, Alabama's football team wouldn't play a game without creating a game plan and practicing that game plan all week leading up to the game. Nick Saban is notorious for his level of preparation and planning to put his team in a position to win. Alabama's 87% winning percentage and five national championships under Saban is a testament to that. Putting in the hard work obviously helps the cause, but knowing what hard work to put in matters just as much.
If you want to run a marathon, you will not merely mark the race's date on the calendar and show up to run. 26.2 miles is a long way to run without training. It helps to have a training plan to follow in advance to get yourself in condition for the marathon. Otherwise, you're pretty much winging it and hoping for the best. Sometimes that works out, but you won't know until the end. Mapping out when you will start training and how many miles you will run each week leading up to the race will increase the odds of you finishing in the time you desire. It will also give you confidence that you will be able to achieve your goal.
What Should a Financial Plan Include?
In its simplest form, a financial plan or strategy should include your goals and what you will do to achieve those goals. It's probably safe to assume the overarching goal for everyone is to become financially independent – meaning you can live the life you are content with on your terms. Notice I said, "the life you are content with," rather than the life you desire. It is unlikely you'll have everything you want in life, so finding the key things that bring you happiness and contentment is helpful.
Before achieving financial independence, there are probably some things along the way you would like to accomplish. You may have some debts you want to pay off. You may have children (or want to have children) to raise and possibly pay for some or all of their college education. You will need to invest money to achieve some of these goals. So, where do we begin?
As a starting point, layout your goals. For goals that require you to save and invest money, we need to determine how much we will need to save regularly and how to invest the money to give us the greatest odds of success with the least amount of risk possible. There is more than one way to invest, so there are multiple correct strategies here.
For goals that require you to pay off debts, we need to determine how much we will need to pay regularly towards those debts to eliminate them within our desired timeframe. Other goals may require us to obtain debt, so ensuring we have enough cash flow to cover the payments is advisable.
It also helps to plan for rainy days and potential catastrophes that can derail your plans and goals. Having an emergency fund and necessary insurances in place for your circumstances is critical.
Lastly, you should probably have an estate plan that details what will happen if and when you die. Who is taking care of your kids, where is the money going, who is in charge, etc.?
Again, all of this stuff could change over time, so it is important to review things periodically.
How Detailed Does a Financial Plan Need to Be?
This is where you will get ten different opinions if you talk to ten other people. My answer to this would be to make it as detailed as you want it, but as simple as possible.
If you like details and prefer to see your account balances out to two decimal places, that is fantastic. Get as specific and detailed as you like in your financial plan. Do whatever will keep you motivated to follow your financial strategy.
Personally, I prefer simple. I like round numbers and ballpark estimates. I'm not going to read through the details of a 50-page financial plan, partly because the moment that plan is created, I know it is inaccurate.
There are so many variables that go into financial planning and projections. There will be a relatively wide range of possible outcomes (further reiterating the importance of financial planning being an ongoing process). If you can tell me the date you will die, the actual rate of inflation for the rest of your life, tax rates for the rest of your life, investment returns for the rest of your life, and any significant expenses that will pop, then I can create a highly accurate financial plan for you. Otherwise, it's all a big guess, requiring review and adjustments as time goes on.
Also, most people aren't going to follow all the fine details. Our brains operate in threes. Give me three key assignments to tackle, and that's about all I can handle. If you give someone 14 different tasks to do at once, the odds are that things will slip through the cracks.
Carl Richards has a great book titled The One-Page Financial Plan. As the title implies, it's all about condensing your financial plan into one page. Get clarity on the big picture goals and let everything else fall into place.
Should you Do Financial Planning Yourself or Work With a Financial Advisor?
As a financial advisor, I am naturally biased. Asking me if you should work with a financial advisor is like asking a painter if you should paint your house. That being said, I will cover the pros and cons of doing it yourself versus working with a financial advisor.
Doing all your financial planning yourself is excellent if you have the time and desire to do it yourself. Most people do not have both. This stuff isn't rocket science. While there are some complex financial instruments out there, the basics of financial planning and investing is relatively easy to learn. If you can make it through college, you can learn everything you need to learn about financial planning to get yourself on the right track. The question is, do you want to learn it, and do you have the time to learn and implement it.
I hace no doubt in my mind that I could learn how to be an auto mechanic and be able to fix and repair any issues that arise with my car. I have absolutely zero desire to learn how to do that, and with two young children, I don't know where I would find the time to do it.
For most people, finances don't interest them. It's boring. If you find it interesting, you can learn the material if you are willing to commit the time. It's not a huge time commitment, but it's helpful to spend at least a few hours a quarter on your finances. If you are on board, then doing things yourself is the cheaper route to go.
If you don't have the time and desire to do your financial planning, you should work with a financial advisor. The benefits you will realize from working with an excellent financial advisor over time will more than outweigh the costs, by far. It's also hard to put a price on the value of having your finances be a source of strength and confidence for you.
Even if you have the time and desire to tackle your finances, a financial advisor can give you another perspective on everything.
Money is a very emotional subject for many of us and therefore clouds our judgment, causing us to make decisions driven by emotion rather than logic, reason, and data. Getting an outside look from someone experienced in this arena can bring light things you may otherwise have overlooked.
Regardless of whether you choose to do your financial planning or work with a financial advisor, you need to engage in the practice of financial planning.