Last week we discussed our new definition of financial planning, which is the allocation of financial resources. Today, we are going to discuss the function of financial planning:
The function of financial planning is simply “to ensure that money exists when needed.”
When you view financial planning through this lens, it completely changes the way that you make decisions regarding your finances, and it should make you re-think the model of planning that has been preached to us for years.
Much like the old food pyramid that showed us that bread and pasta should be the primary food we consume, our model of financial planning is flawed as well. We focus on funding retirement, but neglect our short and mid-term finances. We don’t protect our incomes with proper insurance. We work jobs we hate simply to get a paycheck and benefits, and then complain about both the paycheck and the benefits. I’ve consulted with people that are putting 15% of their paychecks into a 401k, but also overdraft their bank account on a regular basis.
What sense does any of that make? This is why we say that financial planning is the allocation of resources, and should not be confused with retirement planning, tax planning, insurance planning, etc. Unfortunately the industry doesn’t always make that distinction, and that works to society’s detriment.
To put this into perspective, think of the two sides of this coin:
Side 1: Most would argue that the function of financial planning is to make (or grow) more money. Rate of return, compound interest, asset allocation, diversification, etc. are all things we hear about on a regular basis. We make decisions based on how to make the most money off of what we currently have so at some point in the future we have more money.
Side 2: When we know that the function of financial planning is to ensure money exists when needed, it encourages us to make completely different financial decisions. We save money for every stage of our life, we protect our income , we insure ourselves, we create new opportunities for ourselves and allow for passive income, and perhaps most importantly, we focus on our cash flow.
When we start to make the right decisions with our money, more money follows. The function of financial planning-everything we do at DeGroff Financial-is to ensure that money exists when needed. Every situation is completely different and needs to make decisions accordingly.