A few weeks ago I proposed a definition for financial planning in “What is financial planning for?” From the comments most planners see the idea, but some still want it to be simpler. It isn’t, and if it isn’t for planners, imagine where clients are?
“Financial planning means to effectively and efficiently allocate today’s income and wealth to your obligations of the past, to your lifestyle needs and preferences in the present, to your expected needs and preferences in the future and finally to the demands of the government and others in such a way that the financial resources for a) desired lifestyle, and b) accumulated wealth, are both secure and predictable.”
Your resources are assets and future income. You must allocate them to the government to the least extent possible, and you must cover your commitments (the past), debt and children being the most common, the lifestyle and margin for error you will need in the future, all while living the way you would prefer now.
Secure and predictable are higher needs as you grow older because your ability to fix a mistake or deal with bad luck are much more limited. A little overtime won’t help five years after you retire.
What most people miss is effective and efficient.
Effective is about the questions you will try to answer. Most of them are in the form What do I want? What do I have to get it with? When will it appear? Who will be involved? Where will I be? The “W” questions.
The last “W” question, Why? is the one you use to sort out priorities. It will tend to have two parts. Why? and Why not? The difficult choices will need answers to both. Consider savings. Save because someday in the future you will need the money for lifestyle or security. Why not will give you some clues to technique. Things like debt reduction before saving. Those are capable of analysis.
Why not leads to efficiency and one part of that is risk analysis. Resources are limited so using them as well as possible to get the answers is a requirement. Technique matters. Maybe paying off the mortgage before the children hit university. If you make normal mortgage payments and save for education at the same time, will you be happy or sad if interest rates double?
Efficiency involves financial tools and methods. Insurance for risk, investment products for convenience, and tax efficient methods to keep more capital. Tools are easier to understand if they attach to questions. Such as life insurance pays for the past and provides a future when financial assets are undeveloped.
Both efficiency and effectiveness relate to time. You cannot do everything at once and you do not need to do so. Adapt to more efficient methods that you can afford as you go.
The last important method is learning how to use professionals well. A financial advisor to help you find tools and methods, an accountant to connect you to tax opportunities, and a lawyer to help with important products like wills, powers of attorney and trusts.
Keep Peter Drucker’s famous idea in your mind.
“Efficiency is doing things right.
Effectiveness is doing right things.”
At the end you will know why you do what you do, how you do it, and why you have not chosen something else. Meaning! That is how financial peace of mind comes to be.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.