The 2023 Schwab Wealth Survey showed that 65% of respondents lack a formal financial plan. Are you one of them? If so, what’s holding you back, and what are the consequences?
In this post we’ll uncover what a financial plan can accomplish for you, common roadblocks for creating a plan (we’ll go over Schwab’s survey results), and some steps to take if you currently lack a financial plan.
What is a Financial Plan and Why is it Important?
A financial plan serves as a roadmap that helps you make informed financial decisions and achieve your goals. A plan can be segmented, and focus on a few key areas of your finances, or it can be comprehensive, and address every facet of your financial life. Additionally, a financial plan can begin with one very specific goal, and then build over time as your life becomes more complex.
The important thing is, by creating a plan, you’re setting yourself up to meet your financial goals, whether it be to maximize savings and investments, manage debt, minimize taxes, handle unexpected emergencies, prepare for your future, or protect your assets and loved ones.
Schwab's Survey Results
This all sounds pretty good, right? Creating a plan sets you up for success, so why do only 35% of people have a formal financial plan? According to Schwab’s survey, here are the top reasons:
Not Enough Money: According to Schwab’s survey, many respondents felt they didn’t have enough money to warrant a financial plan. I understand the rationale, but this is not the case. If you aren’t wealthy, you still benefit from financial planning. Your plan will simply focus on the factors that pertain to you, such as budgeting, debt management, building savings, or trying to squirrel away money for retirement. Conversely, the more affluent might focus on investment strategy, tax planning, asset protection, and legacy planning. Everyone can benefit from planning regardless of how much money they have.
Too Complicated: As someone who does this for a living, I hear you. I know that many people struggle with the financial planning process. It can be complicated, overwhelming, and generally as you make more money, it only gets more complex, but that doesn’t mean you should avoid the process. It’s worth the effort, and if you don’t make the effort, chances are years from now you’ll be kicking yourself because you didn’t start planning sooner.
Too Busy: I understand, we’re all busy and need our downtime, but you must prioritize. Planning for your future is important, so set time aside to look at your finances and come up with a plan to address the most important issues. If you don’t, your most pressing money issues aren’t likely to go away on their own, so the sooner you start planning, the better off you’ll be.
No Planning Required: Some respondents said they haven’t had a life event that required them to plan. Simply put, you don’t need a “life event” to start planning. If you earn income or have investments, you can start planning around your budget, savings, debt, taxes, and retirement (the sooner you start planning for retirement the easier it is). You can do this regardless of any major events that have or have not taken place in your life. As your life evolves and becomes more complex, you can add additional layers to your plan.
I Need Help, But Help is Too Expensive: 17% of respondents mentioned the cost of working with a planner as a deterrent for creating a financial plan. The cost of working with an advisor can depend on your income, the size of your investment portfolio, or based on the complexity of your situation. However, various studies (by Vanguard, Morningstar, and others) point to the same conclusion: when a person works with an advisor, they experience a net financial benefit. This means the client pays a fee, but that fee is often dwarfed by the benefit gained from maximizing investment returns, minimizing taxes, and eliminating costly financial mistakes.
What are the Benefits of Planning?
We now have a better understanding of why some people aren’t planning, but here’s why you should have a plan.
Successful Outcomes: There are many studies and surveys that show the benefits of financial planning and the data is conclusive; people with a plan, on average, save more, accumulate more wealth, and have more successful outcomes regarding their finances than people without a plan. This shouldn’t come as a surprise because having a plan paves the way for achieving goals, whether it’s finances, work, or sports (or anything in life). When was the last time you put no thought into something and had a successful outcome? By planning you’re increasing the likelihood of success.
Stress Reduction: Let’s face it, money concerns cause stress (I bet you can think of at least one money issue causing you stress right now). Creating a financial plan allows you to manage your money more effectively, which allows you to better address the financial stress points in your life. The more items you check off your financial to-do list, the better you’ll feel and the better prepared you’ll be.
The Basics of a Financial Plan
Chances are you have some idea of what it means to have a financial plan. However, given that such a large percentage of the population doesn’t have a plan, I think it’s a good exercise to at least cover the basic steps.
Step 1: Assess the Situation - Analyze your income, expenses, assets, and debt. Look at insurance policies, estate planning documents, and your tax return. Once you have a clear understanding of where you are, you’ll be in a better position to establish some goals and make a plan.
Step 2: Set Goals - After your assessment, do you like what you see? What needs work? What’s missing? What do you want things to look like a year from now, 5 years from now, or 20 years from now? What stress points are you looking to solve? Although every financial plan is unique, here are some common areas of focus:
Step 3: Create a Plan - After you have established some goals, you need a plan to accomplish those goals. Start with the most pressing issues, or the most consequential, and work your way down. Your plan can be formal with a written outline and action items that you check off a list, or it can simply be mental “notes” of how you plan to go about accomplishing your goals. Either way, educate yourself and don’t “wing it.” Make sure you understand the intricacies of your financial situation and create a realistic plan. You don’t want to wing it with something as important as your retirement or estate plan.
Step 4: Monitor and Make Adjustments - Financial planning is not a one-time event; it’s an ongoing process that requires adjustments as circumstances in your life change so that you can stay on track and achieve goals. You should review your plan periodically or whenever a life event changes your situation or goals.
Do It Yourself or Get Professional Help
Depending on your individual needs and situation, you may want to consider creating a plan yourself or getting professional help.
If you are comfortable with researching financial strategies and making decisions on your own (and sticking with your plan), you might be a good candidate for DIY planning. Many people do this. However, if you feel you just don’t have the time, knowledge, or confidence to plan on your own, a professional can help you create an individualized plan tailored to your needs and help you stay on track. Either way, educate yourself on your options so you can choose the best path forward.
No More Excuses
Creating a plan to address your most pressing financial issues is important because it allows you to take control of your finances, set realistic goals, and make informed decisions about your money. If you haven’t created a financial plan, and you fall into one of the categories mentioned in Schwab’s survey, my goal was to motivate you to finally take action. By emphasizing the importance of financial planning, I hope to inspire readers to take charge of their financial future and create a solid foundation for long-term financial security and success
If you’re interested, you can find the full results of Schwab’s survey here.
Tad Jakes, CFP®, EA