On a macro- level financial Planning can be thought of as the intersection of finance, economics, and psychology. On a micro- level financial planning may be thought of as the question of whether a dollar should be consumed today or saved for consumption tomorrow? This question of resource allocation along with the prioritization of goals like retirement, education, gift and estate planning is a major part of the financial plan. Incorporating these factors along with an understanding the impact of taxes, investment returns and the necessity of insurance is the structure of a good financial plan.
Anyone who has been involved in planning anything from a picnic to long term project knows you have to start with having a good understanding of where things really are and then begin making assumptions about the future. Given that investment returns are a significant factor in determining whether future goals for a client’s goals such as education and retirement, it is best to look at a number of possible scenarios based on a number of assumptions. Since no one can predict the future with 100% accuracy (especially when it comes to financial markets), it is important to constantly monitor the progress along the way in case some adjustments need to be made. When making a set of assumptions it is important that a planner and client is comfortable with the assumptions made. This normally results in keeping to conservative assumptions. Being swayed by opposing outside sources who may project extreme results can be devastating to a client’s plans. Even if someone’s extreme assumptions turn out to be absolutely correct, it may be difficult to stay on course with the plan if those results are taking a long time and producing lots of volatility along the way. The temptation to change courses before it plays out could be too difficult to resist.
It’s also important to not just set some goals and never be open to changing them. While initially there can be some discomfort when changing plans, without the necessary adjustment then obtaining a goal that doesn’t bring the fulfilment desired is not really a success. An open dialogue between a client and financial planner can help to stay in touch with progress, assumptions and goals. By working together the client can realize their goals and the planner receives the fulfillment that comes along with helping them to do exactly that.