What Is Financial Planning?

8 min read
February 23, 2021

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Financial Planner. Financial Advisor. Investment Advisor. Or even Investment Adviser.

Do these terms create vibrations of stress in your life?

Yeah, me too.

You see, I don’t really know what they mean! Every one of these people who calls themselves by one of these titles seems to do something a little bit, if not completely, different from everyone else.

And I know a lot of them.

Further, the financial industry doesn’t seem interested in making any of this clear for families. So, that’s what I’m going to attempt here.

I’m going to tell you exactly what I do for clients – not as a sales pitch, but so that you may be able to take some of this away and apply it in your life.

The Four Areas of Financial Planning

Ok, you won’t find this in any textbook, but here are the four areas as I see them (with greater detail below):

  • Protect What You Have – It makes sense to me that we must protect what we already have before we look to the future.
  • Know Where It Goes – Since we spend money nearly every day, it’s important to know how much where are spending and what we are spending it on.
  • Make It Grow – Of course, investments are an integral part of Financial Planning, but you can see they are not nearly as important as some might have you believe.
  • Independence and Dignity – We want to live out our entire lives with financial independence and dignity, or said another way, we don’t want to live off our kids in our old age.

Protect What You Have

Understanding the protections we have for our assets and making sure they are structured appropriately seems to make common sense. No bank would last very long without locking the vault and no family will likely become financially successful if they aren’t protecting what they have.

There are two primary tools we use to protect what we have: insurance and estate planning.

When I say “insurance,” I mean all kinds of insurance and, more importantly, I mean to address all kinds of risk.

So, this includes your auto and homeowner’s insurance. Your umbrella policy which protects you against lawsuits and other forms of liability. Perhaps you serve on some boards that have created personal exposure to lawsuit, or maybe you are part of your HOA.

Whatever the potential cause for liability, we want to know and understand the risks we are taking so we may consider buying insurance to cover those risks. Note, I am not saying you should always buy insurance to cover everything. I am only saying that you should know and understand all the risks you are taking – as much as this is possible to do!

Life insurance is also important – but only if we have other people in our lives who depend on our income.

This is most usually your spouse or your kids, of course. And notice we are saying they depend on your income. If they depend on your assets, they most probably are the heirs to your assets, so life insurance may not be necessary.

Estate planning does something different: it allows you to make decisions at times when you otherwise wouldn’t be able to.

This includes determining what and how your kids will inherit your wealth. Who will raise them if you’re gone.

It also includes whether you wish to be kept on a ventilator.

Through the standard package of estate planning documents, you can make these decisions today in a clear and legally enforceable manner.

Know Where It Goes

This is the scary one.

No one likes to look at their spending! We live in a very expensive place and the cost of just existing here is very high and makes us uncomfortable to see.

But that is exactly the reason that knowing your spending is so important. If you know that you normally spend $4000 per year on clothing, and this year you have already spent that amount, you will be forced to think through your next purchase with more intention.

In other words, you will begin to weigh the actual value of your purchase vs. the cost.

Once you’ve done this for a short while, it will be liberating. No longer will you be spending $50 on lunch when that is not something you truly value.

So, how do we get there?

We must track our spending. This gives us, at a minimum, the price tag of our current lifestyle. If we get further into this process and assign categories to our spending, we gain even more knowledge and the end result is usually that we spend less while finding much greater joy in our spending.

From a more practical perspective, we have to know how much we spend each year if we are going to project out through 30 years of retirement to discover whether we will be ok. We cannot guess at our spending, because we will always guess too low.

We must track our spending to do financial planning right!

Make It Grow

This is our Investment Philosophy and Strategy.

First, we must have an Investment Philosophy to anchor our strategy. If we don’t, we will bounce from strategy to strategy, likely always choosing yesterday’s winners and experiencing them as tomorrow’s losers.

Realizing we cannot pick winners (and neither can anyone else) is the first step toward a coherent Investment Strategy.

The philosophy my clients and I have includes:

  • Faith in the Future – This is the view that while sometimes things look pretty bleak in the world, they always seem to improve over time. In other words, you might say to yourself in these times “I can’t know exactly how things are going to turn out all right. I just know that things are going to turn out all right!”
  • Patience – At the same time, we know that the world’s ups and downs can last for extended periods. You might say “I can’t know when it’s going to turn out all right. I just know that it’s going to turn out all right!”
  • Discipline – Finally, we stick to strategies that have proven to work over long periods of time in history taking the view “I don’t care what’s working now. I care about what’s always worked, and I’m just going to keep doing what’s always worked!”

The Investment Strategy that comes from this includes an asset allocation that, historically, will get you where you want to go along with a widely diversified approach that includes rebalancing on a regular basis.

We must also be diligent about the investment vehicles we use as well as our service providers and overall structure.

It’s no small feat to manage a portfolio well, but the effort should not be directed at doing “what’s smart today” or even changing the portfolio very often.

Independence and Dignity

This may sound more like an outcome than an action, but we must know what to do today in order to live out our lives with Independence and Dignity.

To do this, we must at least guess at all of our expenses for the rest of our lives including: will we pay for our 5-year old daughter’s wedding? What if Mom has a health care issue? What do we really want to do when we are no longer working full time?

Failing to include realistic expectations over our full lives destines our planning process to failure.

Once we have built a “base case” of projections for the rest of our Financial Lives, we can then play around with “what-ifs.”

What if we take a 2 year sabbatical? We can simply plug this into our model to see how it affects us long term.

What if one of us retires much earlier and we downshift our cost of living? Simply plug it into the model.

And on and on. You see, it’s only at this point, when you have your lifetime projections built, that the true planning can begin!

Cash Planning

At this point, I feel it necessary to add in a Cash Planning process because it addresses so many of the challenges that we face in our Financial Lives.

If we build a detailed cash inflow and outflow projection over the next five years, we will see what net expenses we must fund.

For example, if you have 2 kids starting college in the next five years, how will you pay for it? Where will the money come from?

What if you know your home needs a new roof and that you’ll have to do that within the next five years – same questions. How do we allocate funds for this now so we can be confident we’ll be able to get it done when the time comes?

Those negative net cash flows over the next 5 years should go into a savings or cash account. We don’t want to take any risk with those funds, because they are for expenses we know are coming up.

In addition, we should consider some savings for emergencies. If we lose our job, how long will it take us to find a new one? How do we pay our expenses in the mean time?

If we feel pretty confident we can find a new job within 6 months, perhaps we go back to our Spending Plan and place 6 months of living expenses into savings as well.

Having a solid cash plan allows you to feel confident that you can invest your remaining funds, knowing that even if the market tanks, you won’t need to touch those funds for at least five years.

Now, wouldn’t that increase your confidence in your Investment Plan?

What Gets In the Way

Three things really seem to get in the way of creating and maintaining a good financial planning process.

First, this is boring!

My gosh this is so boring for most people! (Ok, not for me, but I get it!)

If you wanted to spend your time on this, you would have gone to school for it! And let’s face it, the industry doesn’t make it very enticing to do the right things. They mostly try to entice you to do things that line their pockets – not yours!

Second, there are a ton of technical issues that can trip you up along the way. Without the expertise in tax and estate law, it’s very difficult to construct a solid estate plan. Heck without the tax expertise, it’s difficult to confidently do anything financially!

And third, what we are talking about here is being accountable to the you that is going to be alive 30 years from now. And it’s very easy to shirk this responsibility.

Here’s the Good News

There is a lot of good help out there!

First, obviously, you can hire a good Financial Planner to help you. This is what I do, but there are many more like me at www.napfa.org.

Or, if you absolutely don’t want to work with any professionals, at least find a good accountability partner or group where you can pool your financial knowledge. It’s quite rare that anyone does this on their own and finds their own optimal success without great anxiety and effort! 

joemorganAbout the Author
Joe Morgan is a financial planner who works with women that need to reduce their financial anxiety. By providing clarity on their situation, he enables his clients to gain control of their finances allowing them to pursue their life's intentions. He charges a flat fee for Financial Planning services.




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