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The Financial Planning Process: Five Keys to Success

George Grombacher March 29, 2022

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The Financial Planning Process: Five Keys to Success

The financial planning process is something you can master. It can also be intimidating if you’re new to personal finance and/or aren’t currently investing. 


The entire financial services industry is unnecessarily complex. While there are a lot of moving parts to a financial plan, when you break them down one at a time, it becomes a straightford process. 


Fundamentally, financial planning is looking at where you are, where you want to go, and then working to close the gap. I’m going to share five keys to follow to find success in your financial planning process. 


I’ve been a financial advisor for over 20 years, and am honored to have been named to Investopedia’s list of the Top 100 Financial Advisors many years running. Over that time, I’ve come to appreciate simplicity, and have helped thousands of people get better at money. 


Here’s what we’ll cover:


  • Market prices are generally correct

  • Active, passive and index investing

  • Permission to invest aggressively

  • Maximizing your income

  • Knowing yourself


Let’s get started.


Market prices are generally correct


“The efficient-market hypothesis is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to “beat the market” consistently on a risk-adjusted basis since market prices should only react to new information.”


So, what does that mean for you? 

Unless you’re spending hours a day doing it, you shouldn’t try to profit by day trading.


Don’t get me wrong, there are lots of people who successfully trade in the markets. These people have invested in their education and have developed processes and rules which help them to be successful. If this is of interest to you, we’ve got great Certified Partners who can help you do it.  


If you don’t see yourself doing the work necessary to become a professional trader, I recommend a more diversified and passive approach to your investing. 


Active, passive and index investing


What is the difference between active and passive investing? 


As I touched on in the previous section, there are those who attempt to “beat the market.” This is known as investing for Alpha. If the market gets a return of 10% over the course of a year, you wish to get at least 11% or better. Again, this is possible, but difficult. 


Passive investing is deciding you’d rather get the same return as the market, instead of attempting to beat it. So, if the market gets a return of 10%, so do you. 


Which is better? 


Roughly speaking, over the past 15 years, 85% of actively managed mutual funds failed to “beat the market.” This is evidence of just how difficult it is to outperform the market. 


Here’s the problem: active investing is more expensive than passive investing. 


This makes sense when you think about it. When you’re an active manager, you’re spending a lot of time researching and making investment decisions. When you’re a passive manager, you’re simply following the market. 


Because of this, index investing has exploded in popularity. Companies like Vanguard pioneered low-cost index investing and now it’s widely adopted by the majority of investors. 


Permission to invest aggressively


But what if I really want to invest in individual investments? 


Even though it’s widely accepted that passive investing is more effective than active, new fintech (financial technology) companies like Robinhood and Acorns have made active investing popular. 


The rise of cryptocurrencies such as Bitcoin have also become wildly popular investment options. 


Here’s the reality with individual stock or cryptocurrency investing; you’re probably going to lose money. This is a reality I personally learned, and one that everyone must learn on their own. 


If this is something you want to do, here’s my advice; write yourself a permission slip. You do that by determining your short, mid and long-term savings and investing goals, determining what it will take to reach them, and putting the plan into action. 


For example, if you wish to retire at age 65 with $1,000,000 accumulated, and you’ll need to save $1,200 a month, and you’re contributing that much to your 401(k), you’ve written your permission slip. Go ahead and buy the stock or cryptocurrency. 


Maximizing your income


“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.”           – Abraham Lincoln


It’s difficult to do financial planning if you don’t have the resources to do it. The more money you have, the more saving and investing you can do. 


The more you can do to maximize your income, the better positioned you’ll be for financial success. Become a life-long learner in every aspect of life, and most certainly in your professional field. 


Pursue industry training and designations, these will help to make you an asset to any organization and more promotable. 


Also, everytime you get an increase in compensation, apply some of it to lifestyle, and some of it to your financial objectives. For example, if you get a 5% raise, take 3% for lifestyle, and increase your 401(k) contribution by 2%.


Knowing yourself


We all have patterns we follow. You probably start and end every day in a similar fashion. The same is true of your financial behaviors. 


Some of your habits are no-doubt beneficial, while some may be detrimental. The more we can identify and correct our negative habits, the better off we’ll be.


For example, if you’re in the habit of eating out 7 times a week, perhaps there’s an opportunity to reduce that number. This is particularly true if you’re doing it out of sheer convenience. 


If you absolutely love eating out, by all means keep doing it. I suggest you look for ways to optimize your behavior, not deprive yourself. 


Making it real


Financial success is available to you, let us know how we can better help you on your journey. 


An integral part of any financial plan is getting clear on where you want to go. You must also get out of debt as soon as possible. To aid you in that process, you can access our Goals, Values and Get Out of Debt courses at no-cost. 


If you’re ready to become the CEO of your financial life, check out our DIY Financial Plan workshop. 


If you’d like to connect with one of our Certified Coaches, you can do that here


Stay up to date by getting our monthly updates here.


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