Is Your Financial Plan Too Complicated?

August 17, 2015

I am a big fan of the KISS principle when it comes to having a written financial plan.No, I don’t mean the Paul Stanley and Gene Simmons version of KISS. (Although I’m a big fan of Rock & Brews every time I’m out in El Segundo, California.) I mean Keep It Simple Stupid (or keep it simple smarty-pants if the word “stupid” is deemed offensive in your household).

Financial planning is simply the process of aligning your financial resources with your most important goals in life. Everyone needs at least a basic plan regardless of their net worth situation or the season of life. The financial services industry is supposedly here to help but too many sales professionals are still pushing a product instead of a genuine plan and things can seem overly complicated in the world of complex financial jargon.

So what are the ingredients of a “genuine” financial plan? Is it a written document trying to figure out your entire financial life 20-30 years from now filled with colorful charts and financial projections? A book that I recently read does an excellent job of breaking down the financial planning process into what really matters. Most importantly, it simplifies this process into a one-page financial plan that focuses on results rather than an overly complicated to-do list that has a low likelihood of success. Carl Richards’ book The One-Page Financial Plan: A Simple Way To Be Smart About Your Money provides an effective reminder of just how essential it is to keep your money and values aligned.

The best place to start your financial plan is to answer the why question. Richards starts his one-page plan with a question at the top: Why is money important to you? Other important starter questions include “why have I been so anxious about money lately” and “just why do I work so hard anyway?” If you don’t take time to dive deeper and figure out “why planning matters,” your financial plan will lack purpose and meaning.

After you have thoughtfully identified the “why” behind the plan, identify your most important financial goals and put them in writing. (The top three is a good place to start). Then, go ahead and make a list of at least three specific things you must do to reach these goals.

My wife and I sat down and agreed that our deepest held values relate to faith, family, and fun experiences. That is why our family’s financial plan includes saving for short-term goals like funding upcoming vacations while our kids are still young and still think we are pretty cool parents. We try to prepare for our transition to financial independence, which we define being completely mortgage debt-free and having enough passive income to meet our lifestyle goals. We also make sure we have a formal giving strategy that designates how we plan on sharing time, talents, and financial resources with our church and community organizations. The final goal is to fund the majority of our children’s future college education costs (although we have set limits on how much we will cover and expect them to contribute in some capacity).

Take time to assess your net worth. I’ll spare you the whole net-worth does not equal self-worth discussion for another day, but this is a necessary step in every financial plan. The net worth statement is a simple way to put all of your assets and liabilities in writing. Some of those line items can be empowering (like seeing credit card balances approach zero) while others can be frustrating (high student-loan balances). Every item tells some kind of financial story and knowing this back-story can help you focus your priorities going forward based on those past experiences.

The budgeting process doesn’t have to be frustrating. An effective spending plan doesn’t have to be perfect because perfection is a myth in the world of budgeting. You just need to make sure your spending aligns with everything on your list of important goals and remain flexible (e.g., “roll with the punches”).

A good advisor will help you avoid any big mistakes. I see examples of this everyday such as taking out too big of a mortgage, speculative investing, and unreasonable student loan amounts. Finding a trusted professional can be an important part of staying on track with a plan but it can be hard to resist the urge to just hire someone to make all the decisions for you. Instead, find someone that will provide necessary checks and balances for your own decision making. Seek advisors who are transparent about fees and expenses, open about potential conflicts of interest, and will diagnose before prescribing a solution.

Carl Richards does an excellent job of demonstrating that a genuinely effective plan be summarized by a simple one-page Action Plan. The message to take action and just make enough smart decisions without over-complicating things is a refreshing take on the process of planning for your financial future. Everybody needs a plan and you can have one with just one-page, a Sharpie pen, and 15 minutes of your time.