Perspective Matters
Financial planning is a term we've all heard, but what does it really mean? Let's break it down and explore why it matters for you.
UNDERSTANDING FINANCIAL PLANNING PROFESSIONALS
First, it's crucial to understand that anyone can call themselves a financial advisor, consultant, or planner. There's currently no universal standard or definition for these titles. So, when seeking financial guidance, it's essential to ask questions and ensure your objectives align with the professional's expertise.
One credential to look for is the CERTIFIED FINANCIAL PLANNER® (CFP®) designation. According to the CFP Board (www.cfp.net), CFP® certification is the standard for financial planning. CFP® professionals meet rigorous education, training, and ethical standards, committing to serve their clients' best interests.
DEFINING FINANCIAL PLANNING
The CFP Board defines financial planning as "a collaborative process that helps maximize a client's potential for meeting life goals through financial advice that integrates relevant elements of the client's personal and financial circumstances."
In simpler terms, I view financial planning as a collaboration intended to ensure the right person in your life has the right cash to do the right thing at the right time.
THE FINANCIAL PLANNING PROCESS
The financial planning process is both comprehensive and highly personalized. It typically involves several key steps:
Establishing the relationship: This is where you and your planner discuss expectations, responsibilities, and how you'll work together.
Gathering data: Your planner will collect information about your financial situation, goals, and risk tolerance.
Analyzing your financial status: This involves a thorough review of your assets, liabilities, cash flow, insurance coverage, investments, and tax strategies.
Developing recommendations: Based on the analysis, your planner will create strategies to help you meet your goals.
Presenting the plan: Your planner will explain their recommendations and the reasoning behind them.
Implementing the plan: With your approval, your planner will put the strategies into action.
Monitoring progress and adjusting: As your life changes, your plan may need to be adjusted.
Throughout this process, remember that the first answer to most financial planning questions is often "it depends." Every individual's situation is unique, and what works for one person may not be the best solution for another. It’s important that you feel understood by your financial planner, so don’t hesitate to ask whatever questions you feel will help you decide if a specific planner is a good fit for you.
THE IMPORTANCE OF YOUR NARRITIVE
A critical aspect of the financial planning process is your personal narrative. While numbers and data are essential, your story - your values, experiences, fears, and aspirations - provides the context that brings those numbers to life. Your narrative helps your planner understand:
Your relationship with money
Your financial priorities and goals
Your risk tolerance and capacity
Your family dynamics and responsibilities
Your career aspirations and challenges
This qualitative information is invaluable in creating a plan that truly aligns with who you are and what you want to achieve. It's not just about reaching a certain number in your bank account; it's about creating a financial strategy that supports the life you want to live.
KEY COMPONENTS OF FINANCIAL PLANNING
Effective financial planning involves multiple areas of expertise:
Economics and cash flow management
Retirement planning (including ERISA law knowledge)
Risk management and insurance planning
Investment planning
Tax and estate planning
Psychology
A competent financial planner should have broad knowledge across these areas and deep expertise in some, collaborating with other professionals when necessary. No one can be an expert in every subject. Notice the theme of collaboration keeps showing up?
JULIA'S FOUR "RIGHTS' OF FINANCIAL PLANNING
Right person in your life
Right cash
Right thing
Right time
All these factors are crucial. Failing to consider any of them reduces your chances of achieving what's most important to you. You decide each of these, and then you work with your planner to make them happen. It may also be helpful to think about the format: who, what, when where and how; frame each financial goal in terms of answering these questions and you’ll be well on your way to building a successful financial plan.
QUANTITATIVE VS. QUALITATIVE ASPECTS
Financial planning involves both numbers and narrative. While quantifying goals, assets, liabilities, and habits is essential, understanding the "why" behind your financial decisions is equally important. This is where the psychology of financial planning comes into play. Go back to where I talked about the importance of your narrative; your planner will be better equipped to help you if he/she/they understand you as a person, not just a set of data points.
THE IMPORTANCE OF ASSUMPTIONS
When analyzing your financial situation, the assumptions made can significantly impact projections and recommendations. These assumptions range from income changes and savings habits to investment returns and portfolio Volatility. Remember, the answer to how these assumptions should be set often depends on your unique circumstances. Don’t be afraid to ask about what assumptions and trade-offs are built into your plan.
DIVERSE APPROACHES OF FINANCIAL PLANNING
Different financial planners may provide varying recommendations based on their background and experience. For example:
An insurance agency veteran might prioritize risk management
A former tax professional might focus on tax efficiency
An attorney with estate planning experience might emphasize legacy planning
When choosing a financial planner, ask about their priorities and decision-making process to ensure their approach aligns with your values.
WHO SHOULD ENGAGE IN FINANCIAL PLANNING?
In short, everyone should engage in financial planning to some degree. Any time you choose between spending now or saving for the future, you're participating in the financial planning process.
Consider seeking professional help when:
You feel you might be missing something in your financial picture
Your financial situation has changed significantly
You're facing major life transitions (e.g., new job, retirement, caring for aging parents)
You want to ensure you're making informed choices about your financial future
THE GOAL: FINANCIAL INDEPENDENCE
Ultimately, financial planning is about creating and preserving choices. It's about making informed decisions today that will give you more options in the future.
If you're starting to question your financial choices or want to ensure you're on the right track, consulting with a CFP® professional could be a valuable next step in securing your financial future. Remember, the specific approach and recommendations will depend on your unique situation, goals, and narrative.
Neither Prism Planning and Solutions Group nor Insight Advisors provide tax advice, and nothing in this communication should be treated as such. This communication should not be interpreted as a recommendation for a specific investment or tax-
planning strategy. We are providing this material for informational purposes only. We have made every attempt to verify that information contained in this communication is accurate as of the date published but make no warranties. Before making any decisions related to your own tax and/or investment situation you should consult the appropriate professionals.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.