Many people I meet have the idea that Financial Planning is just for "rich people".
This belief just isn't true.
If Financial Planning is only for rich people, how are not-yet-rich people suppose to become rich?
Luck? Magic? A long-lost uncle leaving a massive inheritance?
What if I told you that you can use Financial Planning as a tool to become wealthy?
I understand that you may be skeptical, so please allow me to break down my passionate argument for the value of Financial Planning in your long march toward financial independence.
Before I start, a disclaimer: If you do not earn sufficient income to support your basic needs, no amount of Financial Planning will allow you to become wealthy.[1]
In this post I'm speaking to those with the means to support their basic needs while having something left over to save for the future.
Let's define "rich"
This discussion is useless without a definition for the word "rich."
I actually prefer the word "wealthy" because it fits a little better. Growing "rich" typically implies a goal of pilling up of assets for the sake of piling them up.
If all you're doing is pilling up assets, you'll never really know when you're finished.
"In my mind, I frame growing "wealthy" as the accumulation of assets sufficient to fund that which makes a person most content."[2]
This is your "enough". Your "enough" is unique to you. Your "enough" is what will allow you to feel financially independent. Financial independence looks different for everyone.
Charting a path
Picture this: it's Friday night, and you've got a hot date with your spouse.
This is your only date night this month, and you need to make sure it's special.
What's the likelihood that you'll spend some amount of time planning for this magical night of romance?
I must assume that if you want to stay happily married, the probability is high.
Same idea with your annual vacation - you'll likely do at least some research before booking your flights, hotel, and activities.
Why?
Because you have a specific goal or vision for the result you want to achieve.
"Wealth doesn't just happen."
Date night should be romantic. Your vacation should be refreshing. You know intuitively that you can't achieve these goals without at least some planning. So why on earth would you think that growing wealthy can be done without a plan?
Flying blind
Now you're thinking, "I put money in my 401(k); I'm good to go."
Maybe you are - but there's a good chance you aren't.
The path to becoming wealthy is strewn with hazards. Here's a short list:
Lack of clear goals
How will you get there if you don't know where you are going?
One of the most valuable elements of the Financial Planning process is goal setting.
Right now, ask yourself what your most immediate financial goal is.
Can you define it in a specific manner that includes a way to measure your success or failure, has a deadline, and is reasonably achievable?
An illustration may help.
My next financial goal is to buy myself a trip to Iceland – a destination that’s been on my mind for years now.
The trip will happen in the summer of 2024. I will spend at least two weeks in Iceland, and I expect the trip to cost at least $10,000. I intend to pay for the trip from current income.
If you can’t get that specific with your goals, your chance of reaching them is quite poor.
Read: New Year, New You: Setting Financial Goals
Saving too little
We could file this under the heading above, but I’ll give this item its own section.
If you aren’t clear on what your goals will cost, you may be underestimating the amount you need to save each year.
Nearly every first draft of a Financial Plan that I do for a new client fails.
Why?
Because as humans we are quite bad at estimating what stuff is going to cost over long periods of time. This is another reason you’re more likely to plan your vacation more carefully than you plan your retirement.
Read: How much should I be saving? And where should I put it?
Misunderstanding your Risk Tolerance
I wrote about the topic of Risk Tolerance back in August of 2022 because an investor’s ability to tolerate risk is a key driver of their Financial Plan.
Your Risk Tolerance impacts the amount you need to save for your goals and should dictate how your savings are invested.
Failing to understand your Risk Tolerance can lead to disastrous mistakes.
On the one hand, you may fail to take enough risk and end up falling short of your goals. Or you may take too much risk and set your plan back by months or years if you panic in a rough market.
Read: Risk Tolerance: What is it? Why does it matter?
Investment mistakes
You are a human, and as such you are vulnerable to a host of cognitive biases, errors in thinking, and potential bad behavior (often driven by fear or greed).
It’s well known among financial professionals that the average investor earns below-average market returns.
One of the best defenses against our own human frailty is having a Financial Plan you can turn to when markets are challenging (or your own short-term thinking starts to get the better of you).
Read: Why We Do Stupid Things With Money: A Three-Part Crash Course in Behavioral Finance - Part I
Failing to optimize
To incentivize individuals to save and invest for the future, the U.S. government has embedded a variety of goodies in the tax code.
That sounds great, but you need to understand where the goodies are and how to use them well before you decide you need to use them.
For example, let’s say your CPA tells you on April 13 that you need to open and fund a Traditional IRA to get a tax break. Sounds good to you — but when you start calling around to open and fund an account, you learn you’re too late; there isn’t enough time before the April 15 deadline.
A bit of planning would have given you adequate notice to open and fund that IRA with plenty of time to spare.
Most things in life worth doing are worth doing right.
Trying to grow wealthy without a Financial Plan is a bit like heading out to a party without your GPS app guiding you to your destination. If there were a more direct path to becoming wealthy, why wouldn’t you take it?
If you want to become wealthy, a Financial Plan just might get you there a little faster and a little more efficiently.
Ready to start building your wealth?
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[1] Nick Magguilli from Of Dollars and Data has a great post on this topic here.
[2] A deep dive on this topic can be found in Brian Portnoy's Geometry of Wealth
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