At the beginning of every year, Americans engage in the tradition of setting New Year’s Resolutions. The resolutions may range from losing weight, getting in shape, quitting smoking, starting a new hobby, or some other self-improvement goal. By far, one of the most common goals is “getting my financial house in order.” Like most resolutions, however, this one usually falls by the wayside as soon as people go back to their well-worn routines.
Why do financial resolutions often fail?
I have found there are three primary reasons people find it hard to follow through on their financial ambitions: lack of financial knowledge, lack of trust, and a lack of priorities.
For one, they might not know where to begin, because they don’t have all the financial knowledge they need.
But it doesn’t have to be that way. Financial ambitions can be achieved with just a little help and the right tools.
In a recent three-year study by the Financial Industry Regulatory Authority Investor Education Foundation, researchers found that only 34% of people were able to answer most questions on interest rates, inflation, bond prices, financial risk, and mortgage rates. This was a decline of 8% in just nine years.
We tend to fear that which we don’t understand, which often leads us to inaction. If I don’t understand how to calculate my financial and investing risks, or what the proper tax strategies are for my situation, I may avoid making decisions in these areas altogether. It seems easier to just do nothing.
This may lead us to blindly trust someone else to make these decisions for us. If we don’t want to learn the basics, we become dependent on people who are financially literate. If you’ve ever blindly trusted someone, you know how unsettling that can be. This is especially true if you’ve lost money after someone exploited your lack of knowledge and sold you something you didn’t need.
Still another reason we fail to fix our finances is that we think we will have to deny ourselves today in order to prepare for a seemingly uncertain future. Tomorrow is a long way off, we might think. So, having fun today becomes the highest priority.
Not only that, but the future isn’t set—we may not even live to retirement age—so our immediate needs take precedence. But the reality is that you probably will grow older, and you don’t want to be the person who ends up wishing they had prepared better for the future.
What if you’re already older—is it too late?
I always say that it’s never too late to start the process. I’ve had clients start much later in life, simply because they wanted to be a good example for their kids.
Also, you don’t know what you don’t know. I counseled a rock star one time who’d had a brilliant career, but never saved for the future. He was over 70 years old with little saved and long past his peak earning years. But by the time we were finished, he had a game plan in place that creatively gave him enough income to live out the rest of his life without worrying that he would end up homeless. Of course, it would have been much better if he’d started while his songs were still in regular rotation on the radio.
I want to encourage those of you who think that because you’re older there’s no point in trying—right now is always the best age to start!
Step 1: Building a visual model of your plan
As I discussed, the financial planning process can be intimidating for many people, and this is compounded because schools don’t cover it in any depth. There are so many moving parts to a financial plan that it may be difficult to see how all of them fit together. That is why I developed a visual representation model. If we can see all the parts and how they integrate, it takes away some of the mystery.
Another benefit of a visual model is that it can help us see gaps in the plan. Have all the possible tax scenarios been covered? How about cash flows? Insurance coverages? How about future benefits, assets, and liabilities? If anything is missing, it becomes immediately apparent. It tells us what needs to be addressed and if we are on the right track. If there are financial risks on the horizon, we can deal with them before they have a chance to create problems.
Is your plan coordinated?
Often, people will do financial planning in a piecemeal fashion. And with so many moving parts, a financial plan can become chaotic. When I first entered the financial industry, I would frequently watch videos by a man I admired in the insurance industry—John Savage. John had a way of making everything so simple, and he was always drawing pictures to help convey his thoughts.
One of my favorite illustrations of his was a simple circle. At various points on the circle he would draw an “x” and put a line next to it. He would ask, “who is your attorney?” The client would answer, and then John would write it on the line. “How about your accountant?” And he would write their name on the line. Then he would look at the various investment, insurance, and other financial products that the person had and note that, often, each one had been sold by a different person.
At that point, John would say something like, “In all these areas of your life, you have a professional: an accountant to handle taxes, an attorney to handle your legal matters, a doctor, dentist, etc. Then he would circle all the “x’s” next to the people who sold them financial products and say, “but in this one area, where you have more money than all the other areas combined, you have multiple people.” Then he’d say, “I’m applying for the job!”
In a simple picture, he made people aware of a major problem: They didn’t have a coordinated plan. The person that sold the IRA couldn’t know how it fit with the taxable investment account, and the disability wasn’t coordinated with the emergency fund or with Social Security. So, it’s no wonder the average person gets stressed about their finances!
Why build a visual model?
It’s easy to update a visual plan and see how you are progressing toward your goals. A visual plan makes it easy to note changes in savings rates, work benefits, employer matches on retirement plans, equity in homes, and much more. It allows us to see what is going well and where we need to adjust.
As a degreed planner, my job is much easier if a client walks in with an organized picture of their finances. It saves valuable time that can be devoted to fine-tuning the plan, rather than sifting through reams of paper. I’ve had people walk in my office with old statements and insurance policies that were replaced or lapsed years ago, but they didn’t even realize that it was just unnecessary clutter. Clutter creates confusion, and confusion is the enemy of peace of mind.
A visual model of your financial plan helps loved ones get a quick view of your finances in the event of death. It is hard enough losing someone without having to go through the stress of figuring out what they owned and how they owned it, what benefits they had that were triggered in the event of death, along with who to call and what needs cancelled.
The estate settlement process can be a painstaking process if there is no organization, especially when records are missing. Having an organized picture can help make long-forgotten financial decisions that need to be handled easier and more clear.
Where we’re going
In this blog series, I will walk through the process of putting together a sound financial plan, no matter what your age or point in life. What does a comprehensive plan look like? How do we determine how much to save? What are the options from a tax and investing standpoint? How does risk management fit in the picture? We’ll talk about different types of debt: credit cards, loans, mortgages, and even reverse mortgages. What are some of the mental processes that keep us from saving as much as we should? In short, we have a lot to talk about!
There are six basic building blocks of most financial plans. To help you visualize this, I will use an image of a castle and a moat. We’ll talk more about that soon. The parts are as follows:
- Risk management
- Education planning
- Tax planning
- Investment planning
- Retirement planning
- Estate planning
We will cover each of these in detail as we build the financial plan. We’ll talk about what types of accounts to use and the strategies involved between them, and much more.
Financial ambitions don’t have to be set aside and forgotten like last year’s coupons. Starting on this journey can lead to the financial freedom you’ve always dreamed of. So, let’s get going!
By Paul Winkler
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*Advisory services offered through Paul Winkler, Inc. (‘PWI’), a Registered Investment Advisor. PWI does not provide tax or legal advice: please consult your tax or legal advisor regarding your particular situation. This information is provided for informational purposes only and should not be construed to be a solicitation for the purchase or sale of any securities. Information we provide on our website, and in our publications and social media, does not constitute a solicitation or offer to sell securities or investment advisory services, or a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction.