Financial Plans Are Worthless

I read somewhere that average Americans will spend more time planning their vacation to Disneyland than they will planning their financial future.

I'm not sure that's accurate, but it wouldn't surprise me. There are a number of reasons why we hesitate to plan for our financial future. One of the biggest ones is that we've confused the process of planning with the end product, a plan.

Financial plans are worthless, but the process of planning is vital. Let me explain the difference.

Creating a traditional financial plan starts by making a bunch of assumptions. These assumptions can be about inflation, what the stock market will do, how much you'll save, when you'll retire, how much you'll spend in retirement and even when you'll die.

If you have been through this process, you know that it's very uncomfortable. We know that no matter how hard we try, we will definitely be wrong.

This is one of the cruel ironies of any plan: You don't have the information you need when you start. This is true when you start a restauranta business, or plan the rest of your financial life.

If we accept the fact that even the best plan will be wrong, we can focus our energy on the process of planning instead of obsessing over the assumptions.

Sure, we need to chart a course to where we think we're headed. It will involve making some assumptions about the future. But they're just guesses; make them and move on.

Think of this as the difference between a flight plan and the actual flight. Flight plans are really just the pilot's best guess about things like the weather. No matter how much time the pilot spends planning, things don't always go according to the plan.

In fact, I bet they rarely go just the way the pilot planned. There are just too many variables. So while the plan is important, the key to arriving safely is the pilot's ability to make the small and consistent course corrections. It's the same for investing. It's about the course corrections, not the plan.

Once you have a general idea of your own destination, the focus should shift to what you can do over the short term to get there. Focus on the next three years not the next 10. Thinking in shorter time frames inspires us to act instead of worrying about all of the things that are out of our control.

So set a course quickly, realize that you'll be wrong, and plan on making course corrections often.

A version of this post appeared previously at The New York Times.

Carl Richards is a financial planner and the director of investor education for the BAM ALLIANCE, a community of more than 130 independent wealth management firms throughout the United States. Visit Behavior Gap for more of Carl's sketches and writings.

The Motley Fool has a disclosure policy.


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  • Report this Comment On January 23, 2013, at 12:22 PM, irvingfisher wrote:

    Very interesting point. My plan for my family's trip to disneyworld went the same way.

  • Report this Comment On January 23, 2013, at 3:46 PM, Subsound90 wrote:

    It's not that plans are worthless, it is that people attempt to plan away all of their risks…and since they can’t it becomes a form of procrastination. You need a framework of how to proceed in terms of what accounts you fund and where your money goes. However, planning every penny and worrying over small risks will leave you ignoring the problems till they become monstrous.

    Too many people like to ignore problems till they get too big to ignore any longer and usually then they are too big to do anything about. It becomes a habit to do so. The best thing to do is just start doing it, the best way is automatically. Take nibbles out every pay period into decently conservative allocations with low fees (like index funds) and ignore it. If you can up it by small increments so you don’t really even notice it.

    I got my wife into investing the same way. She has zero investing background and wasn’t really motivated to do so. I got her into putting money at least to the matching (which is very generous at our company) and leave it for a year. Then she looked at all the money put in there and literally squeaked in joy at the money she had saved without even noticing it. Now she plays around with her investments and competes with me for returns, the winner buys dinner at the end of the month. Every habit is a chore to start, but it can become beneficial…if not fun…to stick with it.

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