While it’s true that financial planning is more beneficial if you start as early on as possible, you need not despair if you are a bit behind. Financial planning is worthwhile at any age. The biggest financial planning mistakes you can make are to ignore it completely or to delay it so long that you believe the opportunity has passed you by.
Most people put off financial planning because of misconceptions about the benefits or what the process involves. The Certified Financial Planner Board of Standards (CFP Board) surveyed CFP licensees about mistakes people make when approaching financial planning. The survey found that people’s most frequent mistakes include:
- Failing to set measurable financial goals.
- Making a financial decision without understanding its effect on other financial issues.
- Confusing financial planning with investing.
- Neglecting to re-evaluate the financial plan periodically.
- Thinking financial planning is only for the wealthy.
- Thinking that financial planning is only for when people get older.
- Thinking that financial planning is the same as retirement planning.
- Waiting until a money crisis to begin financial planning.
- Expecting unrealistic returns on investments.
- Thinking that using a financial planner means losing control.
- Believing that financial planning is primarily tax planning
To avoid making these mistakes, realize that the results you get from working with a financial planner are as much your responsibility as they are the planner’s. To achieve optimal results when working with a financial planner, you should:
Set measurable financial goals. Set specific goals and timeframes for achieving them. For example, instead of saying you want to be “comfortable” when you retire or that you want your children or grandchildren to attend “good” colleges, quantify what you mean by “comfortable” and “good” so you know when you’ve reached your goals.
Understand the effect of each financial decision. Each financial decision you make can affect several other areas of your life. For example, an investment decision may have tax consequences that are harmful to your estate plans. Or a decision about your child’s education may affect when and how you retire. Remember that all your financial decisions are interrelated.
Re-evaluate your financial situation periodically. Financial planning is a dynamic process. Your financial goals may change over the years due to changes in your lifestyle or circumstances, such as an inheritance, marriage, birth, the purchase of a house or change in job status. Revise your financial plan as time goes by to reflect these changes so you stay on track with your long-term goals.
Start planning as soon as you can. Don’t delay your financial planning. People who save or invest small amounts of money early and often tend to do better than those who wait until later in life. Similarly, by developing good financial planning habits, such as saving, budgeting, investing and regularly reviewing your finances early in life, you will be better prepared to meet life changes and handle emergencies.
Be realistic in your expectations. Financial planning is a common-sense approach to managing your finances to reach you life goals. It cannot change your situation overnight; it is a lifelong process. Remember that events beyond your control, such as inflation or changes in the stock market or interest rates, will affect your financial planning results.
Realize that you are in charge. When working with a financial planner, be sure you understand the financial planning process and what the planner should be doing. Provide the planner with all relevant information on your financial situation. Ask questions about the recommendations offered to you and play an active role in decision-making.
Successful financial planning offers many rewards in addition to the obvious ability to meet your life goals. When CFP licensees were surveyed about the most significant benefit of financial planning in their own lives, the top answer was “peace of mind.” There are few benefits greater than that.