Broker Check

The Six Principles of Financial Planning

July 22, 2020

What we can learn from taking a vacation

Four Things We Know About Vacations

  1. Vacations don’t solve problems.
  2. On vacation, you choose to do the things you want to do the most.
  3. Planning for a vacation will most likely take place months before you actually go.
  4. Better-planned vacations result in better chances of enjoyment.

Putting all of it together we learn: we will spend time planning for something in advance that won’t solve a problem; the purpose of the planning is to live life, however brief, without the constant worry of making sure that we honor our obligations; and a better job of planning increases our chances of enjoyment.

Why does that matter? All too often, people look at financial planning as only a tool to solve problems—to deal with the burden of obligations. Financial planning, however, is no different than any other tool—it can only be as productive as its application allows. So, if the planning you have done so far was only to address problems, then you most likely overlooked opportunities to plan to live the life you wish you could live.

What else can vacationing teach us about maximizing our financial planning? Below are the keys to planning a successful trip, as well as their financial equivalents:

  • Know your starting point
    • Imagine being blindfolded and dropped off in the middle of nowhere. What’s the first question that would come to mind? Where am I?
    • Financial planning equivalent: Be organized
    • Accounting for all of your financial resources is the equivalent of knowing your starting point.
  • Pick a destination
    • If you don’t know where you’re going, then it is impossible to tell if you are headed in the right direction—your destination serves as the point around which you orient your preparation and any changes to your plans.
    • Financial planning equivalent: Define the life you want
    • The life you want is the point, the vision, around which you orient your financial plans, and that you use to remain oriented as circumstances evolve.
  • Plan for your trip
    • What your neighbor packed to go snow skiing is irrelevant for your trip to the beach.
    • Financial planning equivalent: Act on information specific to you
    • For information to be useful, it must be accurate and applicable—white noise must be filtered.
  • Understand the rules, laws, and customs by which you must abide
    • Running afoul of a rule that should inform or dictate your behavior can be costly, enough so that it might completely ruin your plans.
    • Financial planning equivalent: Understand the rules
    • Unnecessary taxes and penalties are the most obvious costs that folks incur when they aren’t familiar with all the rules that should factor into their decision-making.
  • Know the limitations of the resources you will take with you on your trip
    • How far can you go on a quarter of a tank of fuel before you absolutely must stop to fill up?
    • Financial planning equivalent: Test the limitations of your resources
    • You are not free to enjoy your journey and the fruits of planning if you are burdened with the concern of not knowing if you will run out of money.
  • Follow and maintain your itinerary
    • Following your neighbor’s map to the ski resort for their ski vacation won’t help you reach the beach, and using GPS can help improve travel efficiency by staying on top of road closures, construction, traffic, etc.
    • Financial planning equivalent: Follow and maintain your plan
    • All the planning in the world does no good if you don’t execute your plan. Further, circumstances change all the time that render certain decisions to be good or bad. Staying on top of the latest developments helps the benefits of good decisions to accumulate.

From this, we have created The Six Principles of Financial Planning:

  1. Be organized
  2. Define the life you want
  3. Act on information specific to you
  4. Understand the rules
  5. Test the limitations of your resources
  6. Follow and maintain your plan

The Six Principles of Financial Planning inform all the planning that we do for clients. Our top priority is for clients to live a fulfilling life, and we know that in order to help make that happen we must resolve problems and discover opportunities to maximize potential.