There have been a lot of discussions recently in the financial services industry about the difference between (a) creating a financial plan, and (b) doing ongoing financial planning.
Which is more important? If you’ve got a good financial plan, do you really need ongoing financial planning? That’s our focus in this article (and accompanying video).
A Financial Plan Is Like a Roadmap
Think of a financial plan as a roadmap. As you consider where you want to get to in your future, a plan can give you a birds-eye view. It can show different points in your journey and let you see different possibilities. It’s an important tool to have, but often people get fixated on their financial plan. One of the biggest questions we hear at Christy Capital is, “Is my plan perfect?“
What we’ve realized in working with hundreds of people over the past decade is that financial plans rarely, if ever, perfectly mirror real-world results. Just like those old printed road maps couldn’t show recent road construction or new detours, your financial plan just isn’t going to be 100% correct.
That’s because in order to create such a plan, we had to enter your current income and how much you’re spending—and both of those things can (and often do) change. We also had to use an estimated rate of return—for example, earning 5% for x number of years. In actuality, you might earn more than that; you might earn a little less than that.
In short, to create a financial plan, it’s necessary to use an assortment of inputs. While these estimates should be close to what actually happens, they’re not going to be exact. They should be in the ballpark—they’re just not going to be accurate to the penny.
So, in essence, a financial plan is a thoughtful, careful projection, not a precise prediction.
Remember Old-Fashioned Roadmaps?
Perhaps you’re old enough to remember using paper maps on road trips. You unfolded your map, and it would cover the whole dashboard!
That map had all the information you needed—as long as you were starting somewhere on the map and your endpoint was somewhere else on the map. It could show you the way to your destination.
But you had to do all the deciphering. You had to choose your route (from multiple possibilities) and get moving. If you came to a bridge that was out or a road that was closed, you had to scrap your “Travel Plan,” unfold your roadmap again, and devise a “Travel Plan B.”
Ongoing Financial Planning Is Like Having a GPS
Today, with map apps (like Google Maps and Apple Maps), road trips are a lot easier. With GPS, you have somebody there leading you every moment of your journey.
You put in your starting point and your ending point. The app then gives you three or four different ways to get there. Do you want the scenic route or the fastest way? Do you want to avoid tolls? The app gives you options.
Not only that, it actually directs you: “Take Exit 43 in one mile” And as situations come up—an accident, bumper-to-bumper traffic, road construction, etc.—the app warns you in advance and recommends alternative routes.
That’s a good picture of what ongoing financial planning is. You start with a plan and begin moving in a direction. But as unexpected situations arise — for example, Congress passes a new tax law that will affect you, or you have to retire early due to an injury—your plan requires alterations.
That’s what good financial planning does. It functions like that amazing map app on your phone—and guides you down the best path to your desired destination. What a relief to have a knowledgeable and experienced guide show you a way around obstacles.
Accepting the GPS
I (Tommy) remember my great uncle. He was one of those “map guys.” Anytime we’d go anywhere, he was the guy we turned to for help. He would always show up with one of his big maps, and he’d plot everything out for us.
Then, about 20 years ago, technology changed. People started getting GPS systems. (Remember those little Garmin devices that would sit on your dashboard?) Suddenly nobody wanted an old-fashioned map. They wanted a tiny computer that would tell them exactly where to go, and when to turn.
That was a difficult transition for my uncle. It was tough for him to let go of his beloved maps and utilize a new way of getting from one place to another.
I think many people feel the same way about financial planning. They (perhaps you too) have always gotten along okay with a basic financial plan. It’s worked pretty well for them.
But maybe with so many big changes taking place in the world of finance, the thought is I could use a little more direction. Some guidance would be nice.
Still, it’s a hard decision. What if an advisor wants to take you in directions and point you to places you haven’t experienced before? That can be unnerving, for sure. Even so, we believe it’s a transition worth making.
I wish you could talk to my great-uncle today. He wouldn’t think of using an old-fashioned map. He loves his GPS. In fact, he might tell you that it’s 1.2 miles from his house to the post office up the street!
“So, what are my plans and planning options?”
When it comes to financial plans and planning, some people choose to go at it alone. No plan, no map, no advisor, no anything. They just kind of go with the flow and do whatever feels right. You can certainly do that. But it’s an option we strongly discourage.
Another possibility is to create a financial plan—and then go at it alone. At least then you’d have a general roadmap, which is a good start. But will that be enough information when you encounter inevitable obstacles and tricky detours?
This is the reason we believe the best choice is ongoing financial planning. We recommend you get a financial plan AND work with a professional. For your trip to retirement, get a map AND utilize GPS.
Why is that wise? Because life happens. Situations will continue to arise in the economy and in your life that are not addressed in your general financial plan.
During those times when life doesn’t align with your plan, you need to be able to maneuver and make changes on the fly. A professional advisor can give you that kind of guidance. He or she can build a customized map for you that reflects your unique goals and then work with you year-by-year to make sure that you stay on target.