The real benefits of a financial plan

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The purpose of the financial planning process is to prepare a road-map for clients to follow, using this road-map as a guide to accomplishing all of their financial objectives.

Pretty logical, pretty straight forward, makes sense to me and all my clients. Why do you think the financial planning process works so well? Well, lets take a closer look…

What’s the difference between a dream and a plan?

A dream is a vague notion; a plan is a road-map which has dates and amounts tied to those dreams.

So if you had to choose between a dream or a plan… which do you think would be better suited to getting you where you want to go? — safe to say a plan.

Developing a formal financial plan

With a formal plan you list your most important goals, the amount needed to achieve each goal and the time when each goal is to be achieved. For example, John Doe wants to retire when he reaches 55 years old and wants to maintain the lifestyle (75K after taxes) he has grown accustomed to now, in pre-retirement. A formal financial plan covers everything starting with the soup and ending with the nuts.

What do you think begins to happen after you’ve put a formal plan in place?

Many things start happening:

• you now know what you need to do
• I (as the financial planner) know what you need to do and I can help you better
• because we are both on the same wavelength we work better as a team
• we have objective criteria (the planning software) in which to measure and review our progress

If we get off course, we’ll know it soon enough through periodic reviews… making it that much easier to right the ship, which means we’re more likely to be successful in the long run and stay the course.

• How do you think you would feel a few years down the line if you had a formal plan like this in place? — Probably pretty good
• Do you think it might enhance your confidence and vision of being successful and making sure you got there? — Probably

So lets review, basically besides allowing you to make better decisions, allowing me to help you better, allowing us to work better as a team and having planning software that allows us to review things objectively- we can be more comfortable and confident with the way things are going.

Can you see where I’m going with this?

Creating Self Awareness

The real benefits to the financial planning process are mostly psychological. Since the client is so much more involved and knows what he (or she) is trying to accomplish, they are much more relaxed and unemotional during the journey.

When clients don’t know where they stand or don’t have a financial plan to guide them, there’s a tremendous amount of uncertainty… this drives them to making poor decisions and becoming very emotional, so much so, they sometimes can’t handle what would otherwise be manageable market volatility.

You may start getting phone calls from clients asking to sell this or sell that, etc. These feelings come from a fear of the unknown, of not knowing where they stand, its a natural instinct to protect what’s left when you’re scared. All of these negative feelings can be brought to the surface quickly if there’s little to no financial planning or no communication between the advisor and client.

Having a formal financial plan and the planning process itself keep the client/planner relationship even keeled and, from my experience, often leads to a more rewarding relationship for everyone involved. This way clients are fully aware of where they are right now, where they are trying to go and how we expect to get there.

The real benefits of developing a financial plan are psychological… keeping everyone emotionally hydrated is the key.

Tags: Psychology Behind Financial Planning