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The Seven Deadly Sins Of Financial Planning

Mar 26, 2008
1. Failure to plan. Trite and pedantic, but still number one. "A failure to plan is a plan to fail." [Unknown] While it is frequently reported that people who have their goals written down fare better than those who do not, having seriously considered goals and mentally developed plans to achieve them is a great start. Writing them down so they are available for daily review is a bonus that can accelerate how fast you achieve your goals as well as to increase their significance. Beyond the basic financials, you must also consider the unexpected - e.g., disability, long-term-care, death, and divorce. The critical failure is in not planning at all.

2. Failure to recognize that all finances are interrelated. Finances thread through every part of your life, from income, expenses, and taxes, to credit cards, mortgages, and home equity lines, to life insurance, investments, and college savings, and to business, financial, and estate planning, and to inflation and the time-value of money.

* A $5 treat today costs you $30+ on your mortgage.
* A $20,000 home equity line could cut your mortgage by to 1/3.
* A $2m life insurance policy could cost your heirs $2.9m in estate taxes plus another $1+m in transaction costs to liquidate assets to pay the taxes - total approx $3.9m
* OR a $2m life insurance policy could save your heirs $2m in estate taxes plus another $0.67+m in transaction costs avoided by not having to liquidate assets.
* A simple rental property can result in early retirement and financial independence.
They often say, "Your home is your greatest investment." Are you treating it like one or do you have equity trapped in your home like money hidden under the mattress?

3. Failure to work with a collaborative, integrated financial planning team. A financial planner is not equipped to handle all your needs, nor is any other single individual advisor (which means that doing it yourself isn't a wise move and neither is taking advice from co-workers who are no better off than you). Because finances thread through everything, you literally need expert advice from multiple specialties. Acting independently, your advisors will give you correct but often conflicting recommendations. You need a team of specialists to create the synergy to achieve the right solution for your unique situation. You are neither too young nor too old to start. Neither can you have too little nor too much money to benefit from the insight and guidance of a team of professionals.

4. Failure to consider or fully utilize the myriad tax advantages. The tax codes provide a variety of incentives to encourage desired public policies - from home ownership to investment and economic stimulus to self-reliant retirement. Paying taxes supports our society, but using legal means to reduce or eliminate taxes can dramatically increase the rate at which your net worth grows, which in turn affects everything else. Do you take the vacation or buy the house? Interestingly, buying the house may provide enough tax benefits to pay for the vacation. Are you using a ROTH IRA?

5. Failure to take advantage of company benefits. Company-matching 401K contributions are the poster child of benefits. Then there are benefits for medical, dental, child-care, educational, etc. The decision to work or be a stay-at-home-mom is not a simple as just matching net income because company benefits affect both short and long term planning. Many retirees work solely for the medical and dental benefits. Harkening back to tax advantages, being self-employed (for the right personality type) or a small business owner has huge advantages.

6. Failure to aim to become self-reliant. The statistics remain consistent that by age 65, 1 percent are wealthy, 5 percent are financially independent, 6 percent are dead, and the remaining 88 percent are either still working because they have to or are dependent on the government or family for support. The best approach is to aim to be in a higher tax bracket when you retire than you are now! Along the way, with proper planning, you will discover that you may be able to avoid almost all those taxes.

7. Failure to review and update your plans. The stock market dithers; real estate cycles; income climbs the corporate ladder while expenses follow like a shadow; interest rates rise and fall; families grow and shrink; and ultimately, a plan more than a year old is likely to be out of date. Within a couple of years it might be severely out of sync with your desires, costing you growth in net worth or cash flow needed for retirement income or costing your heirs (or favorite charities) millions of dollars.
About the Author
Robert T. Boyer, Ph.D., Vice President of San Diego's Finest Real Estate, developed the unique concept of Real Estate Financial Planning (REFP) to fill a void left by the financial planning industry. By incorporating REFP into a collaborative financial planning team, we are able to develop a fully integrated financial plan, both saving and earning clients millions of dollars.
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