5 Reasons Why I Think Everyone Needs Their Own Financial Plan

January 28, 2019

Does everyone need a financial plan? Apparently Wealthfront’s co-founder and CEO doesn’t think so. He claims that young people don’t really need a plan if they’re either single and currently saving money, or married, currently saving money, and not planning to have kids, or are single and can’t save. He argues that the first two should generally be okay even without a plan and the last would benefit more from a budgeting app.

However, here are some reasons that even young people in these situations probably need a financial plan:

1) They need insurance and estate planning.

Financial planning isn’t just about saving. In fact, one of the most important things for many young people is having adequate health, property and casualty, and disability insurance. This is especially true if they haven’t had enough time to build up enough savings to help cope with these risks.

Estate planning may seem like something just for older and wealthier people, but let’s not forget that Terri Schiavo was only 26 years old when she fell into a vegetative state without proper planning. That’s why it’s never too early to get the basic documents in place like an advance health care directive, durable power of attorney, beneficiary designations, and a will. Many employers even offer legal benefits to draft these documents for free or at a reduced cost.

2) They may need help prioritizing debt vs saving.

Many young people are tempted to pay down low interest student loans when they may be better off building emergency savings, capturing the match in their retirement plan, paying down higher interest debt, and/or saving for a down payment on a home. Of course, there are situations when paying down those students loans is the better course of action. That’s where financial planning comes in.

3) They may not be saving enough for retirement.

Many young people just stick to the default contribution rate in their retirement plans or contribute just enough to get the match. This could put them on track to be woefully unprepared for retirement, while even a small increase in their contribution rate could mean early retirement after decades of compounding.

4) They may not be fully utilizing tax-advantaged accounts.

I’ve seen many young people investing in a taxable robo-advisor account (like Wealthfront’s) when they could be benefiting from tax-free growth in a Roth IRA and/or HSA or just contributing more to their 401(k). Many are simply unaware of the benefits or how flexible these accounts can be.

5) Their investments may be improperly diversified or too expensive.

Many young people are either investing too conservatively for their time horizon or aren’t adequately diversified in their attempt to invest more aggressively. They also often don’t realize the impact of fees on their long term investment performance or even what fees they’re paying.

This is not to say that everyone needs to pay thousands of dollars for a 100-page “financial plan” that they probably won’t even read. However, practically everyone can benefit from having a chat with an unbiased financial planner who can help them uncover what they’re missing and what they should focus on at this stage in their financial life. (If they’re really fortunate, they may even be able to get this for free from their employer as part of a workplace financial wellness program.)