Why Financial Planning Matters

Story time: you’re a commercial pilot for Delta Airlines. It’s Monday of the work week, and you’re piloting a plane from Reagan National Airport to Los Angeles International Airport. You punch your coordinates into the auto-pilot system and go through your pre-check flight list. All systems go, and you’re ready for take-off. Your flight takes off, and all seems to be going smoothly. However, as you approach the west coast, you realize you’re closer to San Francisco than Los Angeles. How could this have possibly happened? It’s simple - you punched in the wrong coordinates, which resulted in you missing your target destination by a massive distance. This can be explained by what aviation experts call the 1 in 60 rule. This rule states that for every 1 degree a plane veers off its course, it misses its target destination by 1 mile for every 60 miles you fly.

Translation: the further you travel, the further away you are from your destination.

Now you might be asking yourself, what does aviation have to do with financial planning & investing? Believe it or not, a lot. Allow me to explain. 

When building a financial plan, we can’t simply set it and forget it. Auto-pilot doesn’t always work. Life happens. You’ll go from 25 and single to 35 and married. You’ll settle down, buy a home, have kids, then before you know it, you’ll have grandkids. Time flies, and major life events will take place along the way. The plan you created at 25 when you were single will be very different from the plan you need at 40 when you’re raising your family or at 55 when you’re likely approaching retirement in the next 5-10 years.

If we simply crafted a one-time financial plan and forgot about it, years would go by, and we would be more off course than we can possibly imagine. You see, the magic is in the ongoing financial planning rather than a one-time written plan. Making regular course corrections and adjustments as our lives evolve is a huge key to success - and this is true regardless of if you are planning on your own or if you choose to hire a professional. 

Effective financial planning can mean the difference between retiring at 65 or younger vs. working until you’re 85. It can mean the difference between being able to afford your dream home or not. It can help you pay off debt faster which may be holding you back financially. I could go on and on with examples, but I’ll leave it at that and move on.

If this resonates with you and you’re wondering how to get started, here are a few tips:

1. Take an inventory of your entire financial picture as of today:

   a. Cash on hand (paper cash, checking account, savings account, etc.)

   b. Investment accounts (401(k), IRA, brokerage account, etc.)

   c. Debt (car loan, mortgage, student loans, etc.)

   d. Monthly cash inflows and outflows (where your money is going)

   e. Etc.

2. Dial in your budget: if you aren’t sure what your monthly cash inflows and outflows are, start by tracking what you are earning and spending on a monthly basis. Are your bank account balances growing, shrinking, or staying the same from month to month? Once you know where your money is going, you’ll be able to grow your net worth more effectively. If you haven’t already, consider setting up regular transfers from your checking account to your savings account and your investment accounts every time you get paid. Automation here will help you increase your monthly savings rate. Remember, every dollar counts, so start small if you need to!

3. Write down your goals: writing down your goals will help you narrow your focus and increase your likelihood of success. What are you saving and investing for? A new car or home, your children’s college education, retirement, all of the above? How much will these actually cost? We all have different goals, but no matter what they are, writing them down will help us increase the odds of achieving them. On top of this, put the list somewhere that keeps these goals top of mind. A few places you could do this: on your computer or phone, on your desk at home or work, in your wallet, etc.

4. Start investing: hopefully, you have been investing for many years, and your accounts have grown to a healthy level despite the ups and downs of the stock market. But if not, there is no time like the present to get started. We just entered a bear market in the stock market - which means the market is down more than 20% from its previous high. Inflation is the highest it has been in 40 years, and everything seems to be more expensive. Despite these facts, the average historical return of the stock market has consistently outpaced the average historical inflation rate. If we let our money sit in cash forever, it won’t grow, and inflation will slowly eat away at our purchasing power. However, if we invest regularly, buckle up for the volatility that comes with investing (investment account balances will go up and down throughout the years), and stay invested, we will likely be much better off 30 years from now. Remember, however, that investing always involves risk, including the loss of principal.

5. Stay invested: starting to invest is only part of the battle; staying invested will be key to your success. What do I mean? Investors will sometimes try to go in and out of the stock market throughout the year, depending on how their investments are doing and the market is doing as a whole. This is referred to as trying to “time the market” and is a slippery slope. Bank of America looked at the impact of missing the market’s best and worst days each decade:

The takeaway from this is that it is best to stay invested even when we see our investment account balances declining. Failure to do so may cost us dearly when it comes to our long-term investment returns. Pretty powerful stuff if you ask me.

In summary: money matters - financial planning matters - investing matters. Money is a tool that can help us achieve our personal financial goals, but a lack thereof can result in anxiety and stress. Effective financial planning and investing can increase our quality of life and allow us to create the life of our dreams.

I hope that you’ve enjoyed this piece and that it has provided you with some value. Maybe it has gotten your gears turning, and you have some questions related to your personal financial situation. If so, please don’t hesitate to drop me a note via email at johnny@harveygroupwm.com. I’d love to hear your thoughts or answer any questions you may have. Thanks for reading!