When it comes to the subject of financial planning, people often have the wrong idea. Whether they confuse planners with accountants, or assume that the planning process is only helpful for those with a lot of money, the misunderstandings endure. Unfortunately, these misconceptions prevent those who would benefit from planning from ever considering the service.
In an effort to clear that up, here are five common mistakes people make about financial planning.
1. A financial planner will just tell me to stop spending money
It’s a common concern: If you visit a planner, he or she will only tell you to stop spending money. No more eating at restaurants… no more vacations… no more shopping trips… no more fun.
But that assumption may not be true at all. Financial planning helps you determine what you really want, and then shows you how to attain it. Let’s say one of your hobbies is enjoying gourmet food. A planner can help you think about ways to enjoy your hobby even more – maybe you could take cooking classes or invest in nicer cookware or a new knife set. That might lead indirectly to eating out less, thereby curbing your dining costs. The money you save might then be used to start a weekend catering business… which could eventually grow to a full time job where you get paid for doing what you love.
Financial planning doesn’t limit you, but actually helps you enhance the areas of your life that are most important to you.
2. Financial planning is only for the very wealthy
While this is a common belief, it misses an important point: Wealthy people are often wealthy precisely because they planned for it. There are many stories of low earning people saving $1 million or more over their working years. They achieved that with careful planning and diligent savings; in other words, they had a goal and worked toward it.
Financial planning is beneficial for everyone, because it helps you balance living for today with preparing for the future.
3. I’ve got plenty of time to plan for my retirement
It’s never too early to start planning for retirement. In fact, the longer you wait, the harder you’ll have to work and the more you’ll have to save.
Having a plan gives you direction and shows you your options. Without a plan, how can you even be sure when you can retire? Do you know what you’ll need to cover your basic expenses and where those funds are coming from? Do you know if you can afford to take up a new hobby, travel more, or pay off your mortgage? Do you know when the best time is to start drawing Social Security? If you plan to work part time after retirement, do you know what the earnings limits are if you take Social Security before your full retirement age? Do you know how your income taxes will be impacted by withdrawals from your retirement accounts versus your taxable investments? And how do you ensure that you don’t outlive your money?
A financial planner can help you with all of this.
4. I will inherit from my parents (or other relatives) so I don’t have to worry about a financial plan
You may be expecting to receive an inheritance. That’s great, but it doesn’t mean you don’t need a financial plan. After all, it’s unlikely that you know when you’ll be getting your inheritance, or even how much you’ll be receiving.
When we work with clients who anticipate an inheritance, we help them establish a solid plan based on what they know and what they can control, so that they’re never caught unprepared. We also look at how inherited assets are to be received (for example, in a trust that limits access for the protection of the beneficiaries or in a lump sum that may require redrafting one’s legal documents). That could make a big difference in how much you’re able to take advantage of your inheritance.
5. Financial planning is too expensive
Some people miss out on the benefits of planning because they believe it’s too expensive. But that’s like a runner who cuts off his leg because he thinks he’ll be faster with less weight.
Far from being a financial burden, planning can actually help you save money. A comprehensive plan will cover your entire financial picture and will identify areas where you could be more efficient with your dollars, such as refinancing a mortgage, raising your deductible on your homeowner’s policy, or reducing your income tax withholdings. A planner can also identify benefits your employer provides that you may have overlooked, like a match on your retirement plan or a Health Savings Account.
Solid planning can protect you from financial loss by making sure you have adequate protection in the event of a lawsuit. The plan will also identify whether you have adequate life and disability protection and if what you are paying for is what you actually need. And working with a planner can also improve the long term growth of your investments by defining your goals and your risk tolerance and then matching up your portfolio with your timeline.
Taken as a whole, the value of the planning process far outweighs the cost of the service.
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