As we start a new year, we start to think about our goals over the next 12 months. Will we take a vacation and, if so, where? What sort of activities or hobbies will we engage in or fund for our kids? If we have a big birthday or anniversary, how will we celebrate that event and how much will it cost? These shorter-term goals tend to initiate thoughts and discussions about long-term goals.
If we spend today, how will that affect our ability to fund college or retire? As we reflect on these issues, we may feel inadequate and unable to prioritize and quantify them. More often, those longer-term goals are pushed aside given the immediacy of the day-to-day obligations. The result is that we feel a mounting and nagging pressure that we are ignoring these longer-term goals at our own peril.
That is where financial planning can be a powerful tool. It allows us to balance the short-term needs and wants with important long-term objectives. It gives us perspective and enhances accountability. More importantly, the process provides peace of mind. People with a financial plan that addresses the various aspects of their lives tend to sleep better at night.
For example, say Dr. and Mrs. Jones spend heavily on their children’s activities and vacations each year. They also pay for their kids to attend a private school. However, they have very little set aside for college education, a small emergency cash position that may only cover 2 months expenses, and almost no investments outside of their 401Ks.
They are funding a great lifestyle through current income, but since they are in their 50s, they are concerned that they have not saved enough for retirement. They worry about how to fund medical expenses in retirement and if they will be able to maintain their lifestyle throughout both of their lives.
The financial planning process helps people like this by establishing a spending plan to balance their short-term wants with their ability to retire comfortably. It may mean they need to make tradeoffs by reducing current outlays in private school or family trips in order for them to save additional funds for college and retirement. Or it may mean that they need to work longer than anticipated. Furthermore, the process may address their need to help protect their earning power over the next 15 or so years by ensuring that they have the proper disability and life insurance.
An initial plan sets the course of their financial lifecycle and yearly progress reports, not unlike annual physicals, ensure that they remain financially fit.