What exactly is financial planning? Isn't that just choosing good investments?
Some investment folks out there may believe that it is all about the investments. Get a high enough return and everything should just take care of itself, right?
First let me say, your investments do indeed play an important role in your life. In the case of retirement for example, they hopefully provide long term growth during your working years and then help provide income once those paychecks are no longer coming in.
The key word in that sentence is they play a "role". Much like one can't out exercise a bad diet, one cannot rely solely on their investments to take care of a host of potential issues during one's life.
Here are some that come to mind that I have witnessed over the last few decades. (names have been changed)
- Ward and June had two boys under the age of 5. Ward made a good living and June stayed home with the boys. Ward wanted to start a small college fund for the boys.
If we just focused on the investments, at the time, I might have suggested a couple of good mutual funds (529 college plans didn't exist yet) and asked Ward how much he had to invest. If he didn't have a lot, I might have asked how much a month he could commit to a savings plan. But I didn't ask him that.
Why, because I was a financial planner. Not someone just focused on the investments. What I did ask was the following:
- Do you have an emergency fund of at least 6 months of expenses?
- Do you have any debt other than your mortgage?
- Do you have enough life insurance to provide income so you can take care of the boys including college?
- Ward and June did not have anywhere near 6 months of savings in place if an emergency happened.
- Ward and June had several credit cards with high interest outstanding balances
- Ward and June did not have any life insurance
Would it have been more fun and exciting to focus on the investments? You bet. But I didn't get into this business for the excitement. I got into it to help people have more secure financial and empowered lives.
Once we took care of these issues, then and only then was I able to help them set up a college plan.
- Archie and Edith were approaching retirement when Archie's position was terminated. Archie had a good size 401k plan plus an old retirement plan from a previous employer and Edith had an IRA they had funded over the years.
We could have just focused on the retirement plan piece as they didn't seem to have any other concerns. After speaking for a bit though, I learned:
- They did not have an estate plan and had an adult son that had an addiction problem
- Edith had been married before and had two adult daughters. One of which was going through a divorce
- They were planning on cashing out the retirement plans to help out their kids
- If their son inherited a large sum, would that be the best option?
- Did Edith want special previsions for her divorcing daughter?
- Would paying a large amount in taxes and jeopardizing their own retirement be in their best interest?
I saw several issues here that could blow up if areas aren't addressed.
- Lucy was going through a divorce and felt it made the most sense to keep the house and give her IRA and brokerage account to her soon to be ex, Ricky.
- She loved the house and didn't want to give it up
- She was told she would have to pay taxes on the IRA if given to Ricky
- Lucy felt the house would appreciate in value
- I explained that equally valued assets aren't always equal
- We talked about the tax implications on asset division
- We discussed the ongoing expenses related to the house
So, before focusing solely on the investments, it is best to take a holistic view of your financial life and make sure a good comprehensive financial plan is in place.
You wouldn't go off on a cross country trip with only a full tank of gas. You might make sure the car was working properly, you had a map or GPS, you had a credit card or two, checked the spare tire and your AAA membership was paid up, and perhaps made accommodations on where you would stay.
Your financial journey is no different. Don't get stranded.
Any questions, please don't hesitate to reach out. We are here to help.
In good health.
All the best.
Rick Fingerman, CFP®
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.