IS FINANCIAL PLANNING a product or a process? In other words, is a financial plan a document that you can print, bind and put on your shelf—or is it an ongoing activity? This is something of a religious debate within the finance community.
Supporters of the “it’s a product” view are usually dyed-in-the-wool financial planners. Not surprisingly, they believe that financial planning should result in a physical plan—an exhaustive, detailed document that’s full of analysis and projections.
Meanwhile, supporters of the “it’s a process” philosophy are usually people whose DNA leans more toward investing than planning. They prefer the action and excitement of the stock market and see financial planners as bean counters who spend too much time fine-tuning their spreadsheets. These folks believe most financial planning can be done on the fly and that the best plan is simply to find winning investments. To be fair, they might produce a chart or two, but then it’s off to the races with investments.
Which group is right? Like most religious debates, each side makes valid points, but I also believe each is too extreme. The ideal solution, in my experience, blends both product and process. Others have made the analogy to a military battle plan. You wouldn’t rush onto a battlefield without a plan. But once there, you need to be flexible, because things never go exactly to plan. As long as you achieve your objectives, it’s okay if your ultimate path deviates from your original plan.
To me, that approach represents the ideal blend of product and process. Think of financial planning as involving three steps.
Step No. 1: Plan. This is the “product” part of financial planning. As a first step, I always start with the “big four”—that is, your assets, liabilities, income and expenses. If you can get those basics on one or two pieces of paper, you’ll be off to a great start. Continuing with the military analogy, these four variables tell you which way to march.
Step No. 2: Prioritize. Managing your finances isn’t your fulltime job, so you want to focus first on your top priorities. These will be different for each person. But pressing issues might include a portfolio that’s too risky, insufficient life insurance, or a potential estate-tax bill that would outstrip a family’s liquid assets and put the family business at risk. In my experience, if you can address these kinds of tasks right away, you’ll sleep easier—and then you can tackle the longer list of lower-priority items.
Step No. 3: Proceed. This is where financial planning becomes a process. As life evolves, certain events will unfold just as you had hoped: getting married, having children, building your career, sending your children to college, celebrating their weddings, retiring.
But many events will be unexpected. Some will be positive: professional success, a lucky investment or perhaps a large inheritance. And some will be negative, such as an illness or career setback. Because everyone will experience some mix of the positive and not-so-positive, it’s important that your plan is built with a margin for error and that you revisit it regularly.
How regularly? In my experience, you want to update your plan at each life event that materially changes the “big four.” You’ll also want to mark your calendar to take certain steps in every tax year. Depending on your stage in life, this might be an IRA contribution or distribution, a 529 contribution, a charitable gift, exercising stock options or chipping away at a large, concentrated position in an investment.
Adam M. Grossman’s previous articles include Free Lunch, Face Plant and Eye on the Ball. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.