- Jonathan McCarty, CFP®
Financial Plans Suck.
I’m aware I’m being dramatic in saying “Financial Plans Suck”. Stick with me here for a bit though; I’m going to explain why I think spending several thousand dollars for a personal financial plan almost always ends up being a total waste and I’m going to show you what to do instead.
If we could Marty McFly this thing and go back 25 years to sit with a financial adviser, we’d likely walk away with a 3” D-Ring Binder full of enough spreadsheets to clog our toilet.
What’s more, our wallet (for those of you who don’t know, we used to have “paper money” and carried it around in things like wallets or pocket books) would be several thousand bucks lighter.
Now, don’t feel like you have to raise your hand, but how many of you who went through this process still looked at that binder three months later? Six months? A year? I think all the hands have gone down by now….
The obvious disconnect is that the advisor was trying to deliver a tangible take-away for an intangible service and the client never understood, appreciated or used the deliverable. Even more problematic was the fact that once “life happened” and something changed, that thoroughly-conceived plan was rendered inaccurate and (at worst) possibly useless.
Here is what I am positing:
Models beat plans.
A plan is a product of a model - taking a snapshot of the current state of things, queuing it through our value system & financial processes, and “outputting” the best combination of solutions. If you've completed a financial plan, you did go through some version of a model, but you only ran one trial.
Carbon-based human life forms are much better off creating a financial model. We are not static beings and life is too complex to map out in a linear fashion and send to the LaserJet.
A model is a machine which can churn out an infinite number of "plans"– it’s a set of clearly defined values & processes that we define/create to help us adapt to the never-ending change life hands us. To me, the “plan” is just the car at the end of the assembly line.
So, how do we create a model instead? How do we own the machine that helps us process new information, adapt & move forward?
Build your Model:
Set your goals
Stephen Covey, in The 7 Habits of Highly Successful People, says we should “begin with the end in mind”. It’s hard to have a successful journey if we don’t know the destination.
Step #1 therefore is to define what your “Big Yes” things are. What are the big things we want to say “Yes” to? Is it retirement? College? A European vacation? A sweet new ride?
If you’re like most people and you don’t talk about this stuff with your spouse (egads!), goal-setting is an invaluable process. This is actually one of the biggest, earliest value-adds I foster when I’m hired by a new client.
When I get both spouses in the same room, talking about money, and we go through this process of goal-setting - for many of them it’s the very first time. It’s a huge boost to their present-day morale and to their future success to wade through and define the things they want to say “Yes” to.
I’m being dramatic again. What I mean is don’t budget in the traditional sense. Honestly, who really wants to reconcile every line item of their grocery receipt each week? Now, some of you masochist-types may enjoy this exercise, but I know I don’t. In my version of the financial model, we flip the budget around.
Remember those big things we decided to say “Yes” to in Step 1? Well, we do want to budget for those things. Now, this is an area where the help of a professional, holistic adviser is worth it's cost several times over. Ideally, your adviser -understanding your total financial picture - will take those goals, craft a strategy, run simulations & let you know exactly what needs to be done to hit each of those goals with a high level of statistical confidence.
Once we have each of our big goals budgeted for, you’re free to blow all the rest!
Ideally, please don’t actually do that, but I think you see what I’m aiming at here. By budgeting for our “Big Yes” items, we automatically eliminate the “Little Yes” items who love to steal from their bigger siblings.
It’s also a lot easier to maintain this kind of budget, which means you’re much more likely to stick to it.
While Mr. McFly would have had to rely on a legal pad and a TI-83 calculator, there are a plethora of good financial aggregator programs available to us in 2018.
An aggregator is a program/site which draws together many of the elements of your financial picture into a cohesive environment. Most of the tools will allow you to run simple retirement scenarios, debt paydown scenarios, etc.
In addition, you'll have easy access to cash flow statements, balance sheets, etc. They'll help you track your spending, set goals and measure your progress along the way.
The best tech is available on the adviser-side, however (look at me, pitching again…). Your modern adviser will have access to some very sophisticated planning and aggregation software which allows multi-variable strategizing, stress-testing and Monte-Carlo simulation.
If you’re paying your advisor to manage your money anyways, let him do the organizing!
Here’s where the rubber meets the road, and where our model starts to churn out product. Everything we decided on in Step #1 should be automated wherever possible. So: automatic withdrawals & transfers, paycheck deductions, bill pay, etc. We’re going to use the tech as we just described to automate as many things as possible in our financial lives.
When we build out automated processes we help curb undesirable behaviors, which keeps our future-self from being robbed by our present-self. It’s a systematic way of creating a positive, long term habit. Beyond the obvious financial rewards, I can recall innumerable examples of where automation has helped my clients in their career performance, marriage, personal lives, etc. Something inside our brains loves a good, positive habit.
So, ideally with the help of your adviser, open the accounts necessary to automate things:
- Open a “Wealth Coordination (WCA)” checking account
(my vernacular; if you walk into Chase and ask for this you’re going to get some funny looks).
- Open a brokerage investment/savings account
- And, if you’re a credit card user, a rewards card tied to the WCA account.
Your paychecks and other income should flow into your WCA checking account. The checking account should have a cash “cushion” of at around one-month’s expenses, more if you have unstable income. After you have the checking account established, pay yourself first. Make sure you have auto-deductions for your emergency savings, retirement & other “Big Yes” goals set to draw before your bills are drawn. Yes, this feels a little scary but it’s the way to go.
Next, tie all of your bills if possible to the rewards credit card and pay that balance off monthly from the cash in your WCA account. If you want to pay off more frequently, it’s your party.
Lastly, once your emergency savings is fully funded (consult w/ your adviser, we normally want 6-12mos of expenses) you should direct automatic transfers to your investment account. Periodic investing is one of the most powerful ways to create wealth; it has the added benefit of utilizing dollar cost averaging.
The account type you’ll want to use will depend on your situation – 401k, IRA, brokerage, etc.
Here's a helpful graphic we use during our planning meetings:
Last plug I swear – this is a model we’ve replicated hundreds of times with our clients and we’ve witnessed some enormous success stories. If you would like to consult more on your own stuff, please set a time here where we can connect: