Once I learned what financial planning was, it felt as if I was given shortcuts on personal finances. There are those on the inside who understand the true meaning of financial planning, and those on the outside who don’t. There is a large misconception in the public’s mind about what financial planning is, and why it is helpful. Most of us are self-taught when it comes to our finances. Rightly or wrongly, it has led some of us to miss out on the power of integrating our financial lives. I believe we need a better way to think about how our finances impact us and how we can use money for good.
Key Takeaways
- Financial planning encompasses your entire financial ecosystem and breaks it into three simple pillars: Organizing, Protecting, and Building Wealth.
- Organizing is all about understanding your full financial picture — every account, asset, holding, income, debt, etc. – and determining how all these pieces work together so you can find ways to improve your financial health.
- Protecting your wealth is more about protecting yourself and your family from undue risk, whether that’s through insurance or estate planning, than it is about keeping every dollar you have.
- Building wealth involves fine tuning your investments, business strategy, real estate, tax strategies, retirement accounts, and other areas to enable the financial life you are building.
The Big Misconception
Whenever someone discovers that I’m a financial advisor, I can almost immediately tell their level of financial experience by their response. Most of the time, they immediately start talking about stocks and the broader stock market. Other times, they may refer to their 401k at work or, my personal favorite, they want to start investing when they win the lottery.
Entrepreneurs that I meet may have a more nuanced approach, whether that is talking about a specific investment they bought or the advisor that they have worked with in the past. But even the people with more personal finance experience (owning a business will give you plenty of that) still seem to miss the bigger point.
In my opinion, the big misconception is that financial planning is too narrowly defined. As someone who helps families and entrepreneurs build financial plans, most people think what I do is only about stocks, or only about investments. It is only about my 401k, my brokerage account, or my annuity. Many people assume advisors simply sell investments, much like they assume a real estate agent simply sells a home. What most people who don’t work with an advisor don’t realize is that they lack someone who can oversee their entire financial life.
A Better Perspective
Any good financial advisor today is trained in how to be a financial planner. This includes investing money but is nowhere near limited to it. Financial planning is more about connecting all the different pieces of your financial life into something coherent and beneficial for you. What does this mean? It means bringing together your current financial picture: your tax situation, estate plan, investments, insurance policies, retirement accounts, business incomes, side gigs, college savings, student loans, real estate, and anything else associated with you that has a dollar sign on it.
How do you know if you are saving enough to retire? How do you know if you are paying yourself the right amount from your business? How do you know if you are taking advantage of all applicable tax strategies? How do you know if you are protected if you get sued? How do you know if you can afford a new home? Financial planning is not only about fixing your 401k or buying the right investment; it’s about answering the life questions you have never had a place to ask.
If most people are too narrowly defining financial planning, yet still have goals and questions they want to conquer, what can we do about it? We need a better way to talk about our personal finances. One that frames the problems we are experiencing within the entire ecosystem of our finances. In my mind, that can be broken down into 3 simple pillars: Organizing, Protecting, and Building Wealth.
Organizing Wealth
When clients first break through the narrow perception of their financial plan, it naturally illuminates the initial problem: they are disorganized. There are accounts at different institutions, multiple income sources, and sometimes several businesses. While there is nothing inherently wrong with a more complex financial picture, there is no overarching destination to manage each piece of the puzzle.
The first thing I try to do to solve this problem is to build a rough idea of the balance sheet and cash flow of the household. This means looking at every account, asset, holding, income, debt, etc. that is out there. Most times, the result of this process is a page or two that clients have never seen, a simple outline of their entire financial picture.
Organizing your wealth into a structured financial plan is one of the best things you can do for your finances. Once you understand where everything is and how all the pieces work, there are almost always opportunities to improve the picture. That could be through tax savings, simplifying your finances, or simply giving your money a purpose instead of ignoring it.
Protecting Wealth
After organizing your financial life, the next pillar is to protect your finances. Most people do not care or understand the intricacies of every personal finance topic, but many want to know if “they are okay”. Whether that is related to their insurance policies, estate plan, or overall risk level, the level of protection within someone’s financial plan needs to be addressed.
Everything you and your family have built to this point shouldn’t be left to chance. Even though people have different levels of risk tolerance, protecting your wealth is more about protecting yourself and your family than it is about keeping every dollar you have.
Building Wealth
Building wealth is about reaching the point where you decide what kind of future you want to build. Money is meant to be spent, so what does money mean to you? What are the jobs and/or businesses in your life building towards? For some, it may be retirement or selling a business. For others, it could be more time with your family, or simply more generosity or flexibility.
Building wealth will involve tailoring your investments, business strategy, real estate, tax strategies, retirement accounts, and other areas to fit the financial life you are building. The purpose of financial planning is not to invest in stocks to make money. In my opinion, more money is not a goal to pursue; it is a sign of a lack of awareness of what you truly value. Once you understand what you want to build and who you want to serve, building wealth and getting more money can be a great idea.
On Mission
Investments matter. Taxes matter. Estate plans matter. But all of them should work together and not live in isolation. When your tax plan (and tax professional) has no idea about your business or retirement goals, it could mean missing significant financial opportunities. This is a much different philosophy than simply how the market did last week. Financial planning is about organizing the stress of money in our lives, making sure that we are better prepared for whatever life throws at us, and helping us stay on mission towards the world we want to create.
