What Is a Financial Plan?
Financial planning itself is not new, or even very exciting. Well-run businesses have been practicing this common-sense activity since the dawn of the capitalist era. What is new is the application of sound ﬁnancial management techniques to personal as well as business affairs.
Systematic personal ﬁnancial planning involves considering one’s ﬁnancial situation from a lifetime perspective. Starting with an inventory of one’s present ﬁnancial position (current cash flow, net worth, tax situation, portfolio composition, existing insurance policies and retirement plans, and so forth), and a survey of current and future ﬁnancial needs, the planner generates a program designed to achieve lifetime goals.
An ideal plan involves developing a hierarchy of goals. Basic objectives are then secured before less urgent ones are addressed. First comes the fundamental need for security of oneself and for loved ones, achieved through insurance programs, pension programs, and planned savings. There may follow plans for assuring progress in areas of health, education and welfare (assuring adequate resources for desired schooling, medical care above the basic rudiments, and building an estate). If the goal’s hierarchy is thought of as a pyramid, lifestyle objectives are at its apex.
Who Does the Planning?
There are literally thousands of individuals and ﬁrms ready and anxious to do your personal ﬁnancial planning for you. For their efforts, they of course expect to be paid. Compensation may be direct, in the form of fees for services rendered, or indirect, as commissions on investment or insurance products which they happen to sell. Many in fact collect both from you and from the vendors of such products.
Regardless of payment arrangements, the planner will require you to do most of the hard work. You will be expected to pull together all of your personal and family ﬁnancial information for the plan. You will probably be asked to complete an extensive questionnaire regarding your current family and ﬁnancial position, your goals and aspirations, and the priority you place on goals that affect deployment of your resources—such as ﬁnancial security, current income, retirement income, estate building and so forth. To anyone knowledgeable about income tax rules and ﬁnancial markets, a basic ﬁnancial plan will fall almost spontaneously from this compilation of data.
Planners probably do nothing that sufficiently motivated individuals cannot do for themselves.
The primary service performed at the plan development stage, therefore, is the provision of an organized format for assembling relevant data, and an inducement to get on with it. Whereas most of us, if left to ourselves, will procrastinate endlessly, the prodding of a planner often gets us moving on the difﬁcult and frustrating task of collecting needed information.
However, planners probably do nothing that sufﬁciently motivated individuals cannot do for themselves. The forms and questionnaires planners use for collecting data and determining personal ﬁnancial objectives are not closely guarded trade secrets. In fact, most books on the subject include an extensive set of such forms and questionnaires in their appendixes.
Implementation: The Key to a Successful Plan
Whether homegrown or professionally produced, a plan is useless if it is not implemented. Some planners argue that many individuals, if left to their own devices, will never develop a comprehensive plan. They are probably right. But this is not a convincing argument for purchasing a planner’s services. Just as life insurance sold as an enforced savings program will likely be dropped, so an elaborate ﬁnancial plan developed without the close cooperation of the individual will probably never be fully implemented.
Some planners assert that implementation is the key reason you need their services. They will assist you in selecting proper ﬁnancial products to better achieve your goals. Many planners, in fact, charge nothing for developing the plan, expecting instead to be compensated via commissions on the ﬁnancial products you buy through them. Others question the objectivity of those who look to commissions for compensation. Obviously, there are beneﬁts to be had by shopping for the best deal on any ﬁnancial product needed to implement a plan.
If you are willing to do your homework, there are impressive arguments for developing your own plan, and implementing it at your own initiative. Professionals in the areas of law, taxation, risk management and estate planning will of course be consulted where appropriate. But this will be the case whether or not the services of a ﬁnancial planner are engaged, since planners are usually generalists or, at best, are specialists in only one area needed for implementing a comprehensive personal ﬁnancial plan.
Elements of a Personal Financial Plan
Whether your ﬁnancial plan is generated by one of the many computer services now available, which string together pre-programmed information on fundamental issues as they appear relevant for a particular individual, or by virtue of a face-to-face encounter with a real live planner, it is likely to include certain fundamental components in common with the plans of all other individuals similarly situated.
It will include consideration of medical, disability, casualty and life insurance as protection against unexpected calamity.
It will include tax-oriented techniques for accumulating funds for speciﬁc future needs, such as educating children and for retirement.
It will almost certainly incorporate a systematic investment program, which will probably include some tax-advantaged investment ventures.
A well-crafted plan will provide for estate disposition with a minimum of administrative costs and estate taxes.
Most of these components are fairly standard for speciﬁable demographic segments of the population. Even though it will appear individualized, and will probably include a few “whistles and bells” based on your unique circumstances, your “personal” plan will in fact resemble very closely those of your friends who are about your age and are in similar family and financial circumstances.
This is an abridged version of an article that Gaylon Greer contributed to the AAII Journal in January of 1984. At the time, he was a professor of finance at DePaul University and senior partner in the Chicago Consulting Group.