Developing a Comprehensive Plan

A comprehensive financial plan is more than a longer, more detailed list of mathematical projections. Although numbers matter, a comprehensive financial plan is also about developing a philosophy toward wealth and how to attain it. It accounts for your values and priorities. It provides context for evaluating and using financial instruments. It is also flexible and anticipates change; adding new pieces shouldn’t require the destruction or loss of existing structures.

This discussion, originally built around an analogy about a Goodyear house, is abstract, theoretical. So here’s a real-world financial evaluation to illustrate the necessity of a comprehensive approach, one that considers priorities as well as investment performance.

Suppose you are considering two possible options to improve your financial condition. Both options project significant long-term benefits, but in different configurations. Assuming the projections are accurate, which future outcome would you choose?

a. $1,500,000 in accumulation held in a tax-qualified retirement account, or…

b. $1,000,000 in cash values in a life insurance policy with a $2,000,000 benefit.

This evaluation is not apples-to-apples; it’s not even apples-to-oranges. The programs have different tax treatment, investment risk, and contribution limits. Yet depending on one’s financial perspective, you could make the argument that each option can provide both insurance and retirement benefits. And even though the choices have numerical values, some of the very prominent benefits in each program are subjective. Any decision for one option will certainly have ripple effects in other areas, such as estate planning and taxation. Further, financial limitations may make it impossible to implement both options; you may have to choose one or the other. If you don’t have a comprehensive plan for guidance, you can’t make a good decision.

Who Is Your Financial Architect?

Home improvement can be a do-it-yourself project. But Goodyear houses across America are evidence that DIY results are often less than stellar. It’s no different with financial decisions: To maximize the results from their wealth-building transactions, most Americans need some expert assistance. Specifically, you need someone who can help you see the big picture. Many people in the financial services field are technically proficient in their area of expertise, whether it’s insurance, investments, taxes, legal documents, etc. But from among these professionals, you must find someone who also can provide a big-picture perspective, to give you ideas on how to integrate these diverse financial issues and help to construct programs that promote your financial well-being.

Sometimes analogies are a stretch; the comparisons don’t work. But the Goodyear-house analogy is pretty spot-on. A well-designed building usually has an architect. It almost certainly has a written set of plans. In larger building projects, these plans will include future phases of construction. These are essentials to achieving a good outcome, and homes built without competent planning will probably not last, not look good, and waste materials. The same can be said for financial plans. Haphazard, compartmentalized financial decision making does not produce good results.

You may have a variety of financial assets, some of them very sophisticated and profitable. But here’s a simple three-question checklist to see if you are building a solid financial house:

1. Do you have a financial architect?

2. Do you have a comprehensive financial plan?

3. Does it allow for future additions or changes?