What is Financial Planning?
In last month’s blog on inflation, I referenced “comprehensive financial planning” as a way to mitigate the effect of inflation. This month I will explain what “financial planning” is and is not. As with my other blog posts, this is intended to be informative and educational. I’m not writing this for other financial professionals, but rather for my client base (military members and their families) that wants to learn about financial topics. Therefore, I’m not including textbook definitions, or technical financial terms and phrases.
What it is: the application of the Marine Corps Planning Process and Operational Design…to your Finances
Like other types of “planning”, financial planning is the proactive and deliberate process of organizing, arranging, and allocating one’s resources in order to achieve a future desired outcome. As a retired Marine officer, I used the Marine Corps Planning Process (MCPP) and what is referred to as “operational design” when developing military plans. We develop those plans to produce a desired “end state” or outcome. That outcome is driven by a purpose or “intent.” We then develop multiple “courses of action” designed to produce the desired result. The next step is testing those different courses of action against “what ifs” and other variables to determine their effectiveness. We then compare those different courses of action against one another and determine the best approach to produce the outlined goal or end state. I take this same approach to financial planning.
The first step is sitting down with the client and defining their “end state” or goal(s). What is the goal that we are trying to achieve? This could be getting out of debt, paying for a child’s college, buying a home, paying cash for a car, retirement, etc. Next comes collecting all the relevant financial information to review and “organize, arrange, and allocate” under a “course of action” or plan to achieve the client’s defined goal. I then test those planning approaches against different financial variables to see which ones hold up to scrutiny, and identify what changes need to be made to improve the approach. This is followed by comparing the different approaches and selecting the best one. Many times, I present the best suitable options to the client for their selection of the final plan. We then implement the plan.
“Comprehensive” financial planning is repeating this process across the client’s entire financial life. This includes cash flow, taxes, risk management & insurance, investments, retirement planning, and estate planning. Most people don’t realize that each of these areas is connected to all the others. For example, saving for college in a 529 plan involves allocating part of your income into the 529 plan, the selection of investments within the plan, possible state income tax deductions, and tax-free growth and distributions if used for qualified education expenses or tax penalties if used for nonqualified expenses. Retirement planning includes allocation of cash, risk tolerance, the type of retirement account impacts the investment selection and taxation, and the management of the account during retirement has direct impacts on estate planning. Every aspect must be reviewed for its impact on other areas of the client’s financial life. The effective coordination of the client’s financial resources across all of these areas is “comprehensive” financial planning.
A financial planner will then capture this process in a written financial plan that is delivered to the client.
What it is not: selling you products or investments
Selling you products (life insurance, annuities, etc.) or investments (stocks, bonds, mutual funds, etc.) is NOT financial planning. However, the selection of such products and investments can be part of a deliberate and customized financial plan. I’ve had clients that were sold life insurance policies and annuities (for example) or specific branded mutual funds by their former “financial advisor.” They did not have a financial plan or a purpose for the selection of these products/investments. No one has unlimited financial resources. Therefore, we must have a specific purpose to efficiently allocate the resources that we have to produce the best possible outcomes.
Conclusion
Financial planning is the proactive and deliberate process of organizing, arranging, and allocating one’s resources in order to achieve a future desired outcome. The result is a “financial road map” to your goals. It is like driving from New York to California. Most people don’t just get in a car and start driving, but that is exactly how most people live their financial lives. One approach takes you where you want to go. The other leaves everything to chance and the potential for getting lost.
