The Foundation of all Financial Planning

The Foundation of all Financial Planning

When first entering the practice as a personal financial advisor I thought I understood financial decision making. It was easy: 1 plus 1 equals 2; add another 1 and we get 3. Financial Planning was logical and straightforward economics. If someone was in debt, the solution was to have them spend less and pay debt down. If someone had ample reserves, my job was to try to invest the reserves for the best rate of return I could. If taxes were too high, I was to implement tax saving strategies to lower the cost of taxes. Unfortunately, that logic only seemed to work sometimes–certainly not all of the time.

Most would say the foundation of financial planning is, logically, assets or income. However, we are as likely to be driven by emotions as by logic, so before financial planning, it is important that you understand how you think about money, logically and emotionally. Going back to childhood experiences, ask yourself what financial lessons you have learned because, for many, the foundation of financial planning is not entirely logical; instead it may be skewed and expressed as: “What you think about Money will determine everything you will do, with and for Money.”

To truly address the question of how you frame an understanding of financial planning, ask yourself: How did you learn about money management– from mom or dad or someone else? What did they do right and what did they do wrong? As a child, what things did you insist you would never do when you became an adult? For example, I hated carrying lunch to school so I decided when I was older I would never bring lunch to work. That pledge cost me dearly until one day, 12 years into my career, I realized buying lunch every day costs between $1,300 and $2,000 per year, depending on your lunch of choice. A cash flow analysis showed me the cost of that noontime appetite and provided the logic I needed to change my behavior. Ultimately, however, logic was not enough; my emotions had to override my youthful pledge not to carry lunch to work. I had to want to change; without both that emotional commitment, and a willingness to act logically, I would not have.

Often I have met people with debt issues who also possessed ample income to eliminate the debt. However, emotionally, they lacked the determination to change. In these cases when I made suggestions to pay down debt with assets available, a true solution also required that the client not pile up the debt again. Yet, that is exactly what they did, creating even more financial difficulties than when we first met, illustrating how logic is only one factor in personal finances when decisions are driven purely emotionally.

Investing is clearly an art, and many techniques can yield success in your portfolio. Yet, logic aside, most people also have an emotional investment process they believe is correct. Therefore, when a client goes to a financial advisor it is important that the two agree on how a strategy will be implemented and what the client should expect. Setting expectations is essential if the advisor and the client are to succeed together, because the foundation of planning is based upon your unique perspective on money and personal finances: “what You think about money will determine everything You will do with and for money”, logically and emotionally.

Understanding the logic and emotion involved in financial planning is Step One. Step Two is the realization that money is not powerful, but relationships are. Money can get you married, buy you a house and pay for fun things, but only in a relationship can you find true love and build a family. Money can buy Warren Buffett great healthcare, but he, like all of us, will die. So, while neither money nor relationships can keep us alive in this world, relationships provide the highest quality of life. Finally, then, the foundation of financial planning is built upon the awareness that it is our relationships, not money, that bring real power.