Friday, July 10, 2015

Principle # 2: Have A Plan


"Everyone has a plan 'till they get punched in the face." - Mike Tyson

“A good plan now is better than a perfect plan executed next week.” - General George S. Patton


Introduction
On the face of it the value of a plan may seem self-evident, but whether you get hit by an economic punch or have a sub-par plan, it bears repeating, because according to the 2012 National Consumer Survey on Personal Finance, nearly 66% of respondents did not have a financial plan. This is problematic, because in the absence of a plan, how do you know where you are going? And, how do you know how to get there? As Vanguard, the Valley Forge, PA fund giant puts it, “A carefully conceived financial plan is a must-have for every investor. It’s the blueprint that spells out the details of your short- and long-term financial well-being.”

Purpose
Carl Richards, author of “The One-Page Financial Plan” points out, “before you plan…you have to know why you are planning.” Richards goes on to say, “the best financial plan has nothing to do with what the markets are doing and everything to do with what’s important to you – your life, your dreams, your goals.” The purpose of a plan is simple. It provides a roadmap for your financial path. Planning is the process by which you take stock of your life, organize your financial affairs and better understand your values. It helps identify goals and aspirations, and charts a course for the future. A well constructed plan reconciles hopes and dreams with reality, imposes discipline upon the investment process, provides peace of mind and is the basis for all future conversations. It is your personal Rosetta Stone - the reference you return to over time.
                                                                                                                                                       
Basic Issues
A formal financial plan does not need to be fancy, but it should provide an accounting of your assets, liabilities, current and future income, risk tolerance, time horizon and goals. Core issues addressed within the context of a financial planning conversation are saving and spending habits, short term and long term financial goals, expected life changes, taxes, charitable giving, de-cumulation and the passing of wealth to heirs.

The Value Of A Plan
A plan communicates purpose and shows intent toward a goal, but it should also be flexible enough to adapt to changing circumstance. It helps you to think about the issues and align your life goals. A formal plan increases the chance of making good decisions and decreases the chance of making bad decisions. A plan helps remove emotion from the markets and imposes structure and discipline upon the decision making process. A plan creates buy-in and commitment to a course of action, and serves as something tangible against which to gauge progress. Above all a good plan should match with your personal and emotional DNA (it is no good having a plan if you can’t stick to it!).

Bottom-Line
A financial plan is about more than money. It is about why money is important to you and how that translates to your life. It is an insight to the inner individual. Having a plan is critical to establishing good financial habits and setting a path to the future. A plan is something that moves you from being reactive to events and circumstances, to something more measured in the management of your financial affairs. As such, it is probably a good idea to have a plan.

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