“If you fail to plan, you are planning to fail,” is among the many wise quotes attributed to Benjamin Franklin. Unfortunately, it appears that most Americans are not taking Franklin’s advice when it comes to their finances.
Only about one in four people (28%) who responded to a survey conducted by Charles Schwab said they have created a written financial plan. The main reasons cited by those who don’t have a financial plan were that they don’t have enough money or time to justify creating one and that the process of doing so is too complicated.
There are a number of potential benefits to taking the time to create a written financial plan. For example, having a financial plan can increase your financial confidence, guide your risk tolerance, give you greater financial peace of mind, help you create a budget and lead to better long-term financial habits.
On the flip side, there are potential drawbacks to not having a written financial plan. These include the following:
1. Not achieving your financial goals. This is summed up by another famous quote, this one from Lewis Carroll: “If you don’t know where you’re going, any road will get you there.” In other words, without a written financial plan, you may not even have financial goals.
For example, the main financial goal for many people is to retire by a certain age and be able to live a certain lifestyle. But if you don’t have a financial plan that states when you want to retire and what kind of lifestyle you want to live, you’ll have no way of measuring your progress toward this goal.
2. Delaying your retirement. Let’s say that you do have a target date of 65 years old in mind for retirement. But instead of writing this down as part of your financial plan, it’s just a vague number that you have in your head.
In this case, it will probably be harder to devise an investment strategy that enables you to meet your retirement target date. This could result in you have to work longer than you expected in order to save enough money to retire comfortably. In fact, creating a written financial plan might even enable you to retire earlier than your planned retirement date.
3. Assuming more (or less) investment risk than you intended. Every investor resides somewhere on the risk vs. return spectrum. Some are comfortable taking on lots of risk in exchange for potentially higher returns, while others are more risk-averse and content with lower returns.
Assessing your level of risk tolerance is a key component of creating a financial plan. This will dictate how aggressive you are with your asset allocation — for example, is your portfolio heavily weighted toward riskier stocks and stock mutual funds or safer bonds and cash equivalents? If you don’t have a written financial plan, your asset allocation might end up riskier (or more conservative) than you want it to be.
4. Not being financially focused. We all know people who have a hard time remaining focused — their attention tends to jump from one thing to the next, and their activities follow suit. The same thing can happen to our finances if we don’t have a plan to refer to.
A written financial plan can serve as a blueprint for every aspect of your financial life, helping you stay focused on your big-picture strategy. This can help you avoid jumping into and out of different investments and strategies based on the latest investment “flavor of the month.”
Give us a call if you have more questions or would like assistance in creating a written financial plan. We can work with you to identify your financial goals, risk tolerance level and investing timeframe so your plan is custom-tailored to your specific circumstances.