1 - Financial Planning

This is an interest which will, from time to time, occupy my thoughts and provide an opportunity to help people.  Where in the world besides America is there so great an opportunity to become who you most want to be, to have and provide for a family, to become financially independent, to be free to enjoy liberty.  And yet, money and finance is an area in which the vast majority of people are sadly under-educated, misinformed, misled, and generally lost. 

But wait, you say.  This can't possibly be true, you say.  You know people who "obviously" do well, you say.  How can I make such a gross generalization, you say? 

Okay.  Let's break it down.

-  Majority of people:  There is a Department of Labor statistic that says only 10% of Americans are financially independent at age 65.  They go on to say between 70 - 80% become completely dependent on friends, family and social security. 

So 90% of Americans do not make it to financial independence and most of those are truly dependent on someone.  That's in a country where you will make $1,000,000 between ages 20 and 65 if you earn $22,222.22 per year each and every year.  No raises, no cost of living increases, just a little over $22K.  Think about that.  

By way of comparison, the median income in the USA was around $50K in 2009 according to the US Census.  That would be earnings of $2.25M over the same 45 years.  The conclusion one should draw is there's a huge part of the country making more than $22K each and every year, and $22K is a very minimal income figure.  

But I digress.  Back to the minimum to make $1M.  

Sure, you say, but you have to pay for housing, food, clothing, taxes . . . you can't do anything with $22K, right?   

This kind of thought ought to scare you.  Not only will you be surrounded by people who are not planning their financial lives well enough to make it on their own throughout their lives, they will defend their right to do so.  Some, maybe even "many", of those will demand support "from someone" when things go poorly.  Politically, this is good for demagogs and zealots, but bad for the country.  More important, it's bad for you.  It leads to the whole "haves and have nots" discussion.  Though silly, all manner of uncivil behavior comes along with this, including envy and greed.  Just think, in one fell swoop you can nail down two of the seven deadly sins by pursuing this line of thinking.


And by the way, you can make an extra $500,000 with that $22K a year.  How?  Put 10% each month, about $185, into investments earning 6% over inflation on average for that 45 years.  That's how. 

-  Under-educated:  That last example is a great lead in to this subject.  When was the last time you saw a course in high school or college, attended by most students, that talked about income, expenses and budgets?  How about debt?  I won't even ask about insurance and investments.  When did you, as a parent, sit down with your children to talk just about income and expenses?  Did anyone sit down and teach you about how money works, or have you, like most of us, simply blundered into one financial encounter after another, picking up whatever you could along the way. 

Well, the latter is largely my case.  I actually had a few courses in college, but got little financial training elsewhere.  A financial life follows a fairly predictable path with enough variability to account for individual tastes.  It is charted by a series of fairly standard and expensive events along the way.  Among these are marriage, a home, children, higher education, occasional weddings, trips, and a comfortable retirement.  Our first financial adviser outlined this for us 34 years ago. 

So what do people actually plan for?  That's plan, not day-dream, wish, hope or pray for.  To have a plan means one must have "written goals" to achieve by specific dates.  One must have thought about "how" to achieve those goals.  The goals part of this is pretty easy.  Start with the marriage, home, retirement sequence above and add or subtract whatever you want. 

The planning part takes some extra effort.  If you built a home, you would buy lumber and nails, plumbing and electrical supplies, and other materials all in accordance with plans usually prepared by, and construction subsequently supervised by, an architect or engineer.  Well, the raw materials used for financial planning are goals, income, expenses, savings, debt, insurance, investments and taxes, among others.  

The typical family financial plan generally does not benefit from the efforts of a financial engineer or architect.  Instead, plans are formed by individuals and families around the kitchen table, families without any particular knowledge of, and therefore a certain reluctance, to apply the raw materials to their situation.  Some of those plans work out.  Others not so much.  How many?  I'd refer you to the Department of Labor statistics above.

We should be clear here, though -- people are not stupid.  They just lack some or all of the grounding to make well conceived decisions about their plan to achieve their goals.  They muddle through the best they can, and are generally content with their efforts in a stable or growing economy.  They worry a lot in poorer economies.  They can do better, but need help they can trust.

-  Misinformed and misled:  When you hear talk on radio or television about finance, do you immediately think of bankers and billionaires? 401Ks and company matching?  The movie "Wall Street"?  Does the term "debentures" give you one of those glazed "thousand mile stares"?  When you hear the financial news on television or radio is it all about daily highs and lows for the Dow and S&P 500, a handful of "best performers", and do you get the sense you should run right out and buy or sell something?

If so, I can confidently assure you only the 401k comment is close to relevant to a basic financial plan for most folks.  Bankers may or may not have something to do with it depending on how much debt one has taken on (and that could very well be a bad thing).  It's fair to say most of us are not billionaires and are therefore very far removed from their particular financial issues.  There are a lot of very smart people out there who will tell you free of charge that chasing stock performance is a fool's errand.  And Wall Street?  Really?

Think about the topics mentioned above.  Much of what you hear sounds a lot like Las Vegas or the lottery, glitz and glamor, and most is a distraction.  One can actually make financial planning a great gamble by chasing performance.  News flash -- people like Warren Buffet are not gambling.  They are making judgments about which companies will profitably endure.  If financial security and independence rank among your desired lifetime outcomes, you need not take great gambles.  This is especially true if you use time to your advantage.  Why allow yourself to be distracted from the elements necessary to construct a serious plan with an above average chance of achieving your goals? 

Goals, income, expenses, savings, debt, insurance, investments and taxes, are among the foundations of financial planning.  That's where the initial focus should be. 

-  Generally lost:  So let's summarize.  A large number of Americans are unsuccessfully muddling through their financial lives.  Most have plenty of income, and think they are doing fine.  Most are not well informed of the basic elements of a financial plan and would not recognize a deficient or unbalanced plan for just this reason.  What they hear in the press and on television, with few exceptions, is generally unhelpful even from the financial news networks. 

I'll go out on a limb and say most people could use a financial planner they trust.  Yes, I am a financial planner -- got all the licenses and have advised people.  Before that I was an Air Force officer, and later a Department of Defense contractor.   We were lucky to meet Lamar Smith, our first financial adviser, who did the leg work to get us on a solid financial path.  After 34 years of Lamar and his successors' efforts, we're on a solid financial path.  I am now teaching as many as will allow me about financial planning.

The point of all this is if you don't have a financial adviser or coach, and don't have the time to devote to learning all you need to know to plan effectively, you probably need one.  You should shop around to find one who will address the fundamentals:  goals, income, expenses, savings, debt, insurance, investments and taxes.  You should get comfortable sharing your financial life with whomever you choose.  At the same time, you should read up on these topics so you can participate intelligently in planning your financial life. 

What do you think?