What I Learned from Doing a Financial Plan

I have never had a financial plan built for me, which is somewhat embarrassing, even hypocritical. I have said numerous times that investing has to be tied to your goals, so I suppose it’s fair to say I was paying lip service to this idea.

So why didn’t I practice what I was preaching? I guess the way I rationalized not having a plan was that I wanted to wait until I settled into my house, literally and figuratively. Now felt like the right time, so I grabbed our CFO (and planner), Bill Sweet, who also happens to file my taxes, and told him I was ready to do this.

We started with big picture items; Income, assets and liabilities. Then we drilled down into retirement saving. Am I maxing out my 401(k)? What other retirement accounts should I be funding and how? What does Robyn’s retirement accounts look like? Each of these decisions are critical and at least as important as your asset allocation. Your stock to bond ratio has to work in concert with the right dollars going to the right places.

Then we spoke about how much cash do I want available, given that Robyn is taking a year off when we have our second child, and given that my income is already levered to the stock market. I settled on about 6 months of spending, which might seem high to some people, but peace of mind is far more important to me than the drag of an under performing asset.

When you build a financial plan, you have to make a lot of assumptions. We’re not big into forecasting, but in this case it is a necessity, and the more conservative your assumptions today, (high inflation, low expected returns), the less likely you are to run into trouble in the future. But the forecasts that really determine the health of your financial plan are not the quantitative assumptions, but the qualitative ones.

My wife and I never sat down and thought about our long-term goals, so all the qualitative questions Bill asked me were things I haven’t spent much time thinking about.

  • Do you want to pay for Koby and his brother to college? Yes
  • Do you want to help them after college with rent? I don’t know. Maybe (maybe means yes for planning purposes)
  • Do you want to retire? Yes
  • Do you want to travel before you retire and after? Yes
  • Do you want a second home? Maybe
  • Do you want to leave your children money when you die? Maybe

Bill told me he doesn’t understand why people would want to leave an inheritance, to which I replied, “I don’t know how I’m going to feel about leaving my kids money when I’m older, but here’s how I feel today. If I die prematurely, of course I want them to be taken care of, like I was. My mother passed when I was 25 and the money she left us allowed me to pay my bills when I didn’t have a job, pay for a wedding, and buy my first home. Now, to state the absolute obvious, I would give anything for this to not have happened, and I felt very conflicted about the money she left us, but I’m glad it was there, and I know she was too.”

I said all this to Bill and he apologized, which I told him wasn’t necessary, because I understood what he meant. He meant assuming I live a full life, would I want to leave my adult children money? My response was, “How the heck would I know how I’ll feel at the end of my life. I’m 34 years old.” But we had to make a decision, so I went with maybe, which again, means yes for planning purposes. You can always change from yes to no, but it’s hard to go from no to yes.

And this is the thing about a financial plan that I think a lot of people misunderstand. Financial plans are not written on stone, but rather in sand. Expected returns turn into realized returns, people grow, and goals change. The plan is a reflection of your future life today, which will look almost certainly look different tomorrow.

After all of this, the likelihood of achieving my goals was 46%. A word on this number; You don’t want to be too close to 100%, because then you’re probably spending way too little, and money is for spending, not for hoarding. The 46% didn’t cause me any agita because 50% of the inputs won’t come to fruition. The returns and inflation numbers will be wrong, my saving and spending will be wrong, and our goals will change.

I did all of this without my wife, which probably was a mistake, but I brought her up to speed after. We sat down and spoke about what we want for us and our family today and in the future, which is something we never took the time to do.

When I say that everyone needs a plan, I don’t necessarily mean that everyone needs a detailed financial plan. What I mean is that you need an investment plan. This should start with the basics, like where are you investing and what does this process look like. If you don’t know what you’re going to do next month if the market goes up 10%, you don’t have a plan. If you don’t know what you’re going to do next month if the market falls 20%, you don’t have a plan. And if you don’t know where you’re going, you’ll never get there.

I wouldn’t say the plan was life changing, given where I am in my life, but I’m certainly glad I did it. This plan is the first step toward creating the type of life I’m working for, and I suspect it will become more meaningful to me as these goals draw closer.

If you want to create a plan but aren’t ready to use an advisor, there are plenty of free options out there. If you do want to speak to an advisor, you know where to find us.

 

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