Financial Plan vs Financial Planning: Key differences between the two. If you ask me, it’s all about your financial “plan.”
The “difference between financial planning and budgeting” is a question that has come up in the past. There are many key differences that you should be aware of when looking at these two topics.
When customers are dissatisfied with their financial advice, it’s often due to a mismatch of expectations. This mismatch may occur when people mix up the terms “financial plan” and “financial planning process.”
Clients who are aware of their financial planning relationship’s expectations are less likely to be disappointed. As a consequence, those customers’ relationships are likely to be more valuable.
With that in mind, knowing the difference between a financial plan and the financial planning process should be beneficial. That way, you’ll know what to anticipate if you opt to engage a financial advisor.
I recall receiving my first personal financial plan. It was really for my mum. It was a long time ago, and it’s probably one of the reasons I chose to become a financial counselor myself.
My grandma had left some money to my mum. My mother decided she wanted me to assist her relocate her money elsewhere after waiting a couple of years for the broker to accomplish anything.
I did some investigation into local financial planners. We chose to engage with an hourly financial planner I discovered on the internet. She gave us a well prepared, eloquent personal financial plan for $800.
My mother kindly praised the planner for her efforts after paying the flat price. “What am I going to do with this?” she said as we walked away. I’d want you to tell me what we’re going to accomplish and to assist me in carrying it out.”
That comment emphasized one of the main contrasts between a financial plan and financial planning, which I didn’t know at the time.
I’d want to make a couple of remarks before we get started:
This isn’t an advertisement for a financial planner.
I have the designation of Certified Financial PlannerTM. In the financial planning sector, this certificate is the gold standard. I have to develop a comprehensive approach to financial planning in order to get these grades.
This approach requires knowledge & experience in the following areas:
- Investment strategy
- Insurance preparation
- Planning for retirement
- Creating a Will
- Tax preparation
This material, however, is only for instructional reasons. My only purpose is to demonstrate some things for you, the reader, to contemplate. It’s entirely up to you whether you want to employ a financial adviser or handle things on your own.
There are many people who are clearly capable of managing their financial relationships & living their best life. This is essentially the primary goal of the financial planning process.
An continuous process isn’t better or worse than a thorough financial strategy.
It’s absolutely unique. In certain cases, one or the other may be more suited to your requirements.
Self-starters, for example, may gain the most from a strong financial strategy that guides them in the proper way. Others may choose to have a long-term financial planning relationship with reputable financial specialists.
This article makes an effort to demonstrate this. Let’s start with an explanation of what a financial plan is.
What is a financial strategy?
Simply described, a financial plan is a document that contains the following information:
- Your financial status right now
- A list of financial objectives for the long run
- To attain your future objectives, you’ll need to make financial judgments or make sensible financial actions.
As you match your money to your life, this generally just becomes a list of things that need to be done, evaluated, or considered. This concept is often influenced by the point of view of the individual with whom you’re collaborating.
An investment manager, for example, will create a strategy that addresses your investments. Agents will develop a strategy for discussing insurance products. Your accountant may be able to assist you with tax preparation.
However, putting multiple financial areas of your life into a coherent strategy may be difficult.
The fundamental objective of a financial strategy is to bring everything together.
In other words, a financial plan should address all the areas where your life & money intersect. And it should do so in such a way that all the moving pieces work together. This is known as the holistic, or comprehensive planning approach.
Otherwise, you’ll be posing difficulties in one area while fixing problems in another.
Implementing a retirement investing plan, for example, is pointless if it excludes short-term objectives such as college savings for your children. If you’re sick of being a landlord and have no intentions to dwell in the new home, doing a Starker exchange to delay your tax payment won’t help.
Let’s examine the financial planning procedure.
What is monetary planning?
The financial planning process, also known as financial planning standards, has seven phases, according to the Certified Financial Planner Board of Standards (CFP® Board):
- Understanding the client’s personal & financial circumstances
- Identifying & selecting goals
- Analyzing the client’s current course of action & potential alternative course(s) of action
- Creating a suggestion for financial planning (s)
- presenting the proposal for financial planning (s)
- Putting the financial planning advice into action (s)
- Monitoring progress & updating
To put it another way, financial planning is a continuous activity. A element of the process is creating a financial plan.
Following the presentation of the strategy, the plan must be implemented and monitored. Plan monitoring assumes that new information will be included into financial plan changes.
These changes will be made gradually. As fresh information becomes available, additional changes are made, and so on.
What is the difference between planning and making a plan?
There are two significant aspects to consider:
1. Plans are useless, but preparation is essential.
If you’ve ever been in the military, you’ve probably heard President Eisenhower say this.
It is, however, an incomplete quotation. From President Eisenhower’s official files, the remainder of the remark reads:
There is a significant difference since, while preparing for an emergency, you must start with this: the very definition of “emergency” is that it is unexpected, thus it will not occur in the manner that you anticipate.
Eisenhower, Dwight D.
That phrase encapsulates the core of financial planning. When creating a financial strategy, it is impossible to anticipate every conceivable circumstance. In fact, by the time the financial plan is done, it may not even address the current situations!
Unexpected circumstances will arise when you carry out your financial strategy. Or immediately after you put it in place.
These occurrences may make the original financial strategy obsolete. Having a financial planning process in place, on the other hand, may assist you in updating an existing plan when new information becomes available.
Because there’s always something around the corner, the financial planning process has no end by design. When life throws a wrench in your plans, the financial planning process may help you deal with it.
The image below is a basic graphic that I’ve previously used to demonstrate this subject.
A financial plan is one step in the process of financial planning.
A financial plan is for a certain period of time. The financial planning process is iterative, with modifications made on a regular basis to accommodate for unanticipated developments.
To put it another way, a financial plan is fixed, but the financial planning process is fluid.
2. The financial planning process may include a financial plan.
Presenting the financial plan is technically Step 5 of the financial planning process, according to the CFP® Board’s financial planning criteria. The first three phases are to build a connection with a customer, understand their long-term objectives, and acquire information. Those measures are really more crucial than actually delivering a financial plan.
If the assumption is that the planner will deliver a sound financial plan that the customer will follow on their own, neither party will be motivated to concentrate on the first two phases.
But let’s take a deeper look from each person’s point of view.
For the customer
A customer may just need an investing strategy and asset allocation model. They may also want a “to-do” list so they can go out and get to work.
The client may not want to go into detail about their narrative, or may believe it is inappropriate to disclose during their little time with the planner.
For the planner’s benefit
The financial planner probably will have developed a streamlined process to simplify things For the customer. This might include an acquaintance meeting and a way to securely upload or drop off a number of documents.
These papers might contain the following:
- A statement of cash flow
- Accounting records
- Policies for life insurance
- Tax returns, for example.
The information will then be analyzed by the financial planner. The planner then presents the plan, as comprehensive as the information gaps allow, makes suggestions, and the two part ways.
Simply constructing a detailed financial strategy and then parting ways has various obstacles. Here are a few examples.
Financial planners have a significant barrier in gathering the necessary data. It might be difficult enough to get the needed paperwork.
The more difficult task, however, is identifying all of the underlying difficulties that have a significant influence on a person’s money. These particulars aren’t revealed in a two-hour meeting.
When a customer knows, loves, and trusts their planner, those details start to emerge. It’s difficult to get this degree of understanding in a transactional relationship. This makes it difficult to acquire accurate information.
Plan with precision.
Even if it’s a comprehensive financial plan, how complete is it if you can’t be sure you’re using all of the needed data?
It’s fantastic to have a strategy in place. The finest plans, however, are those that result in real work being completed. But it doesn’t stop there.
What happens when unexpected events occur as you begin to cross items off your to-do list? What if anything on your to-do list interferes with something crucial that wasn’t discussed?
A one-time strategy may work, but it is the client’s obligation to know what to do after the plan is delivered.
Does this rule out the possibility of a financial plan for me?
When a financial planner is offered the option of providing a one-time financial plan or an ongoing financial planning partnership, the economic incentive favors the latter. After all, you have the option to charge extra.
However, the ability to charge more means that there is greater value available. In today’s subscription-based culture, having an ongoing connection makes sense.
In today’s world, everything is predicated on a subscription model. Simply have a peek at your phone. Alternatively, how you consume music, films, or literature.
The days of buying an album and listening to it over and again because you couldn’t afford to purchase another one are long gone. Now all you have to do is download iTunes and listen to anything you want.
You don’t need a movie collection. All you need is a membership to Netflix, Amazon, or Hulu, which all provide limitless access.
Why should a long-term financial planning partnership be any different? It’s possible. However, it’s similar to joining a gym as an outside runner: why bother if you’re not getting anything out of it?
Here are a few scenarios in which you might not require a long-term relationship:
Your financial planning requirements aren’t very complicated.
I was an E-4 in the military for almost 20 years. I was paid $200 every pay period and lived in enlisted quarters. I had no vehicle, no wife, no children, no debt, and no home.
All I needed to do was stay out of trouble and make it until the next paycheck. Everything that landed up in my account was spending money since I had followed the philosophy of paying myself first.
A financial plan would have likely helped me concentrate my savings efforts. But I didn’t need to speak with someone every month or quarter to stay on track.
This, however, may alter as your life grows more complicated.
You’ve got your money under control, but you’d like a check-up.
Whether you contact a financial adviser, check to see if they provide reviews. Many planners refer to them as “financial tune-ups” or “financial check-ins,” among other terms.
In essence, you have your own strategy (even if it isn’t codified) and want to discuss it with someone to check whether you’re on track.
This is totally acceptable, and many financial planners will provide this service.
You have a rudimentary grasp of your money and are looking for a to-do list.
You have no strategy, unlike previously. But you’re doing everything properly (or so you think). You have solid money habits, yet you have ‘next-level questions,’ such as:
- What should I do with my money now that I’ve built an emergency fund and exhausted my retirement savings options?
- I’ve got Creating a Will documents, but can someone give me a once over?
- Can someone double-check that I have adequate life insurance?
These are the kinds of questions that financial advisors like delving into. Also, respond.
You just have ONE issue to deal with.
Perhaps you have a rental property that you’d want to sell and would need some one-time tax assistance. You may be able to get an insurance coverage and then proceed.
You can probably accomplish this on your own with a one-time aid if you know the difference between a one-time scenario and an ongoing problem.
For example, you may only have to pay taxes once when your rental property is sold. However, since your insurance requirements may alter over time, you should re-evaluate them on a regular basis.
So, why bother with financial planning in the first place?
That is an excellent question. While many individuals might benefit from a basic plan, checkup, or to-do list, many more would benefit from a long-term financial planning partnership.
Here are some examples of how financial planning might help:
You have a financial strategy in mind, but you don’t know where to start.
Receiving a large list of ‘to-do’ things might be overwhelming. The most difficult element is deciding which problem to address first.
This might be challenging if you’re not acquainted with how your financial life’s many moving parts interact. A financial planner may assist you in executing your strategy by assisting you in developing it and then breaking it down into manageable action items.
You are aware of your finances, but lack the time, interest, or energy to stay on top of them.
Maintaining awareness of things that may affect you takes time, effort, and interest. Even if you have a solid foundation of knowledge, keeping up with developments might take time you don’t have.
Your financial planning should reflect changes in the legislation as well as the financial services environment, just as you wouldn’t trust a doctor who is up to speed on the newest procedures from the 1980s.
If you don’t want to do the job yourself, consider hiring a financial planner to perform the research for you and provide well-researched, current suggestions.
You’re not sure what the distinction between “good” and “optimal” means.
Personal finances aren’t that difficult. Personal finance may be as easy as earning more than you spend, avoiding adopting poor habits, and protecting yourself from worst-case circumstances for many individuals.
Everyone, however, comes to a point when they must make a choice. Depending on their circumstances, this decision moment might be:
- What kind of college savings plan should I choose for my kids?
- When does a standard IRA become a better investment than a Roth IRA?
- When should I begin receiving Social Security benefits?
- What can I do to reduce my tax burden?
- When I die, where does my money go?
Whatever the case may be, the difference between a decent and ideal selection might be thousands of dollars. It may also be a distinct ideal between two families that seem to be identical.
A qualified financial advisor may earn their fee just by assisting you in making the best selection for your circumstances. In fact, most effective financial advisors want to do precisely that to show their worth.
And you should employ them if they can show that value.
You believe you’re taking the proper moves, but you’re not sure where they’ll go.
This is arguably the most significant issue, therefore I’ll elaborate in the next part.
“You have no idea where it’s going to go,” you say.
By nature, I speak with a lot of folks who want to leave the military. “Should I select SBP or a term insurance policy?” many of them ask. or “tax consequences if they sell their rental property.”
However, with most of my close friends & colleagues, I get a different picture. While I do get some of these tactical questions, I’m also able to infer a lot more information, because I know them and their families.
Often, the extra degree of understanding leads to a more pressing question:
“What will I do when my profession no longer defines my life?”
Consider this. When individuals leave the military, the default question is “What job am I going to have?” rather than “What am I going to do with my life?”
That presupposes you’ll be able to find work when you leave the military. Even if you’ve reached financial freedom, you won’t be able to live your greatest life until your new employment fits with that vision.
You may be that person if you had all the money in the world but have no idea what your ideal life looks like. You’re aware of who he is.
On Friday, he takes off his uniform, and on Monday, he puts on khakis and a polo shirt, and nothing else has changed.
‘That man’ enjoys his work about 1% of the time. He considers it to be his life’s ambition. The mindset of ‘that person’ might vary from ambivalence (hey, it’s a salary, so I can do whatever I want on weekends) to outright agony (IHTFP has a meaning, right?).
Isn’t it all for the sake of financial security?
That is where a financial planner makes their living. First and foremost, a financial planner or investment consultant may assist you with the calculations.
But that’s standard operating procedure; you can do it yourself using Mint or Personal Capital.
A really involved financial advisor will sit down with you and discuss your future plans after you are no longer need to work. And that’s usually more difficult than figuring out what your number is.
Many of my colleagues have informed me that the talks in which they tell their clients:
- Why don’t you just retire now?
- You’re not spending enough money (i.e. you’re artificially restricting yourself)?
- You want it, right? Go for it?
It might be tough to determine when you can start enjoying life after a lifetime of austerity, living within your means, or delayed pleasure. Even if you know you have enough money, you may need authorization to spend it.
This occurs to a LOT of retirees, believe it or not. Their financial advisors give them ‘permission’ to buy that automobile or take the grandchildren to Disney World.
That may seem like a long way off right now, but how do you know when you’ll get there? What would you do if you got there?
Consider having a financial planner review your money immediately.
You intend to work for another ten years only to make sure you’re healthy. Would you believe the planner if he told you that even after his charge, you could live your life as you like and leave your work today:
- Are you willing to give up your job?
- Hire that planner to assist you stay on top of your money so you don’t have to return to work?
In a heartbeat, ‘That man’ would. But he’s been so preoccupied with whining about his work that he’d have to find something else to occupy his time.
Even though it looks to be, it is not a zero-sum game. A qualified financial planner, on the other hand, can help you regulate the emotional elements of your money as well as the statistics.
And if you do it correctly, you may match your money with the activities you want to devote the majority of your time to.
Is establishing a connection with a financial advisor and paying their fee worth avoiding an additional ten years of work? That is something only you can determine.
This was designed to be a quick introduction to the differences between financial plans and financial planning. Sorry. But I’m hoping it will help bridge the gap between those searching for a financial planner and financial planners who want to assist them.
The “difference between financial planning and financial forecasting” is the difference between the two. Financial planning is a long-term plan for your finances, while financial forecasting is a short-term forecast of what your finances will do in the future.
- financial planning and budgeting (pdf)
- financial planning and budgeting example
- a budget is a financial plan
- planning vs budgeting vs forecasting
- what is a financial plan