10 Indicators You Need a Financial Plan
As a CERTIFIED FINANCIAL PLANNER™ professional, these are the 10 most common “red flags” I see amongst young professionals that let me know they need a financial plan.
Cash “piles up” in your bank account
Cash piling up in a checking account usually indicates there’s no actionable plan in place. Your growing balance sits in cash and constantly reminds you that you could be doing more with your money, you just aren’t sure where to save it, how to best invest it, etc. The cash sits there like an uncompleted homework assignment you swear you’ll get to soon. Thinking about it stresses you out and it gets pushed off to ”later”.
Without a financial plan in place, you could be:
Paying more in taxes as you don’t make proper use of tax advantaged accounts.
Stressed out: The lack of a plan around your money makes deciding what to do with these funds confusing, stressful, and you fall into a cycle of procrastination.
Losing money that sits in cash (after inflation).
Missing out on growing that money over time through prudent investing.
Cash “disappears” from your bank account
You make good money but you’re not sure where it all goes. Money not diverted to a separate savings account gets spent each month, almost without thought. It’s existence in your checking account is almost like giving yourself permission to spend it. A checking account is the least appropriate place to keep money you want to save but since you lack a plan for your money, your paychecks go into your checking and aren’t seen from again.
Financial decisions are driven by fear, not knowledge
My Mom’s 401k was invested in cash for 30+ years (I wince in pain while typing this). Why? She knew stocks could potentially go down in value which was scary for her so she avoided them and stayed in cash.
The Price She Paid?
Instead of earning a long term average return of +9% per year investing in the US stock market (6% after inflation), she was LOSING 3% every year after inflation! If you compound this 9% per year difference in return over 30+ years, the numbers are so large it will blow your mind. Don’t believe me? Read about The Mistake My Parents Made That Cost Them $600,000.
Only knowledge can overcome fear’s influence on your financial decisions. If you lack the knowledge (or access to a professional) it’s safe to say your fears will influence your financial decisions for the worst.
You’re planning for (or just had) a big life change
A new job, new raise, new baby, new house. These are all milestones and signs that you should take a big picture look at your finances. When your life changes in big ways, it often brings with it changes in how you should approach your money.
You have clear financial goals, but are unsure how to bring them to life
You may want to know if you can afford to buy a home worth $___, start a business in ___ years, pursue a new career, be on track for retirement (or early retirement), afford having more work/life balance, travel more, provide for a family, send kids to college, provide support to parents or other family, etc.
Bringing these goals to life requires a financial plan that outlines which goals are highest to lowest priority, how much to save for each goal, to which account, how to invest it, and how all that can be done based on your specific financial situation and personal values/priorities (this is doubly important for couples as they must be on the same page).
Your goals are vague
You have vague goals (ex. “I want freedom”, “I want security”, “I want to work less”) that live in your head, but you’re unsure how to make them SMART (Specific, Measurable, Attainable, Realistic, Time Bound). If your financial goal is not specific enough to be quantified, then it’s not specific enough, period. A financial planner explores your goals with you, together you collaboratively refine them into SMART goals, then the planner provides an actionable financial plan to get you there. With vague goals it’s difficult to decide on what you should do when you’re not crystal clear (a goal you can quantify) on where you’re trying to go.
Example: Becky’s financial goal is “freedom”. A good financial planner would drill down deeper with her in a collaborative way:
How does she “define “freedom”? What will “freedom” allow her to do? How much money does it take to achieve “freedom”? By what date? How exactly will her life change (or not change) once she reaches freedom? These are just a few of many things a good financial planner will evaluate in creating a financial plan for Becky.
Friends & family guide your financial decisions
It is common for young professionals to lean on well meaning friends and family to help them make financial decisions. Problem is, it’s almost always the blind leading the blind. Even if you have a friend or family member who seems financially “educated”, they’re likely just going to regurgitate “rules of thumb” and “one size fits all” advice they read about online (i.e. “if you’re young a Roth IRA is better”). A financial plan often takes over 20 hours of work for a professional to create. Do you think a 30 minute talk with your friend or family member who “follows the stock market” is an adequate replacement for a holistic financial plan?
You try to “Time the Market”
You’re scared the stock market is overvalued, so you sit on cash for years waiting for “the crash” that you fear will happen, so you can then start investing as if it will be 100% clear when that time comes. Instead, the market continues shooting up and you miss out on big gains. Many can relate to this over the past decade.
By trying to “time the market” you miss out on big returns trying to predict what can’t truly be predicted and subject yourself to a roller coaster of emotions (greed, 2nd guessing, and many behavioral bias’s). The cost of what you “didn’t do” (invest regularly and consistently over time) costs you big time not only in dollars, but also in piece of mind, self-esteem, and confidence in your financial future.
Investments are chosen reactively, not proactively
An investment strategy should be chosen in conjunction with a financial plan. What you’re trying to do with your money should dictate where you invest it. Without having a plan to ground your decisions (or a strong financial education), you’re prone to making financial decisions reactively instead of proactively (ex. investing in Bitcoin just because your friend raved about it). Information is cheap these days, knowledge on how to apply that information to your life is what really moves you forward.
Having a financial planner helps you create a prudent investment strategy and block out all the “noise”. Noise is all the “advice” out there on how you should invest your money yet none of it is specific to your situation. This noise is thrown to anyone willing to read it and at it’s best is no more than a list of “things to consider” (i.e. get a rental property, invest in this, buy that, etc). Applying all this disconnected information into a financial plan (that connects the dots) requires knowledge & experience.
Your finances are getting complicated and it’s difficult to keep track of everything
Many people start out managing their investments and finances on their own. That might work for some time, but as your money and life get more complex, it can be difficult to manage all the details or realize your plan’s shortcomings without help.
If one or all of these resonates with you, consider talking with a professional to get your very own holistic financial plan in place. Financial planning is one of those services that can pay for itself many times over from the financial benefits alone (not even counting the time it saves & emotional benefits it can provide).
Reach out for a free 30 minute introductory call if you’d like to learn more.
Jonathan Grannick, CFP®
Wonder Wealth, LLC