On Being Your Own Financial Planner

February 17, 2009 by  
Filed under Financial Planning

I have decided to put my limited skills as a fantasy interviewer into hibernation which will no doubt please many readers.  So I will move on to another subject that interests me and perhaps you:  Being Your Own Financial Planner

My Own Financial Planner – In the Beginning

With the consent, cooperation, and assistance of Mrs. ToughMoneyLove, I appointed myself as our family financial planner some years back.  This more or less coincided with my decision 17 years ago to leave my first job as an attorney and, with my present partner (and others since), start a new firm from scratch.  By necessity, this required careful planning because starting a new business like that generally means that there will be a period of no income.  Our start-up was no different.  We were already parents of three young boys so we had to control and prepare for the financial risks ahead.

I am a strong believer in the concept of being your own financial planner because it is your money at risk and your financial future being planned.  You are the person best qualified to understand your risk tolerance and life goals.  However, being your own financial planner works only if you have the time and energy to put into the job.   It also helps if you have some aptitude with numbers.  Having been an engineer in my first career, I was quite comfortable working with numerical data and calculations.   Be honest with yourself on this critical issue.  Although financial planning for most people is a long way from being rocket science, some people just don’t play well with mathematical concepts.  That’s OK.  They can get help from a trusted professional.

Are You Equipped to Plan Your Financial Future?

How do you know if you have the aptitude to be your own financial planner?

I suggest you start with three tests.  First, can you create and operate a spreadsheet?  Second, do you (or can you) manage all of your money in a personal finance software package, such as Quicken or Microsoft Money?  Third, can you prepare your own income tax return?  If you can’t handle these tasks, you probably have no business doing your own financial planning.  That’s not a put down – your circumstances may just be too complicated.

The Key Components of Being your own Financial Planner

Here is my take on the subject:

1.  Get educated.  It is so much easier now to acquire the core knowledge and skills related to basic financial planning.  Much of it can be found on the Internet.  The rest of it is available at the library.  Use both of these resources.

I would start with learning the basics of micro- and macroeconomics.  You need this foundational knowledge to understand what is going on in our economy because that has a direct effect on all aspects of your financial life and particularly your investment strategies.  Learning about inflation, government fiscal and monetary policies, the business cycle, and the banking system are key components of your needed skill set.  I have previously written about how you can get a free education in basic economics

There are hundreds of books and thousands of websites devoted to personal finance and investing.  Many are not very good, many are repetitive, and some are just plain crazy with trying to teach you a “system.”  To get you started, educational sites that I would trust for personal finance basics include the Financial Industry Regulatory Authority and Consumer Reports Money.  I would also devote a lot of time reading Scott Burns’ articles  Burns is one of the best common sense personal finance writers in the business.  I have learned a lot from his writings.  The blogs and columnists at MSN Money are also excellent but keep in mind that you are reading a lot of diverse opinions.  The Federal Reserve has compiled some great educational resources as well.  Don’t follow blindly everything you read (including here).  Use what works for you.

Burns is also the co-author of one of the personal finance books I would recommend as well, Spend ’til the End.  Other suggested readings include Your Money or Your Life by Dominguez and Robin and, when you are ready to delve deeper into the investing side, The Intelligent Investor by Benjamin Graham.  There are many others.  I am not a fan of formulaic books written by authors such as Dave Ramsey, Suze Orman, or Robert Kiyosaki.  I’m not saying that they are right or wrong, just that they don’t teach you to be your own financial planner.

If you want to get more formal and structured in your personal finance education, local colleges and adult education programs frequently offer courses.  If you prefer to do it on your own, the University of California at Irvine has a free online course in the Fundamentals of Personal Financial Planning.  I have not taken the course but have studied the syllabus.  It looks quite good.

2.  Acquire the tools.  As you become educated in the world of personal finance, you should begin to acquire the tools needed to implement that knowledge.  These tools include the personal finance software of your choice and setting up online access with your various banking and investment accounts.  Knowledge is power in many aspects of life and that is particularly the case with your money.  With all of the technology available today, there is no reason for you not to have direct, real time access to information about all of your money and investments.  Waiting for quarterly or even monthly statements doesn’t cut it for me.

You should also attempt to establish a relationship with your banker.  If your banking relationship is strong enough, your banker can grease a lot of wheels for you.  In some cases, your banking relationship can get you things such as a brokerage account with free stock trades, like it did for us.

If working with a budget becomes part of your plan (as it does for most people) there are some excellent online budgeting tools (some free) that you can use for this component.

Finally, you may become interested in the “consumption smoothing” concept for financial planning as I have.  If so, there is a tool for that as well.  The full version is not free but it may be worth it anyway. There is a basic version that costs nothing to try.

3.   Gain Confidence.  It is hard to be successful in anything – personal finance included – unless you have confidence in your abilities.  Confidence comes from preparation which is what steps 1 and 2 are about.  You can continue to build confidence in some areas by practicing.  For example, if you want to test your abilities and knowledge in setting up a portfolio for your retirement investments, set up a fake portfolio and watch what happens.  A good way to do that is by using the portfolio feature of Google Finance.  It is highly customizable, easy to follow, and Google won’t try to sell you anything for using it.

Another good resource for creating and trading in a fantasy stock portfolio is Wall Street Survivor.

You can also create an entire investing and life economic plan and analyze it using predictive financial planning software.  A new one that I like – and that is a free download right now – is called Financial Fate.  You can run some hypothetical plan decisions through that software and see what happens.  That will build confidence as well.

4.   Get the family on board.  In my opinion, if you are married, you need a joint financial plan.  Even if you keep part of your finances separate (we don’t), your long range planning should be comprehensive enough to include the both of you.  So decide which of you will do what in your planning (or pick one of you) and pull it all altogether.  No secrets, no hidden agendas, no lone wolf attitudes.  If you can’t agree, don’t fight about it.  Instead, agree to disagree then hire a pro and follow his or her advice.   Too many marriages suffer or crash and burn over money.  Make sure yours isn’t one of them.  Many excellent financial plans have been ruined by divorce.

5.  Set Goals.  A financial plan is a roadmap leading to one or more goals.  Goal setting is not something to be taken lightly.  Becoming rich is not a goal.  Being frugal is not a goal.  Owning your home is a goal.  Putting your kids through college is a goal.  Retiring with a stable income is a goal.  Many of the financial planning books you read will talk about goal setting.  Scott Burns writes about “consumption smoothing” which is an economic concept that I think is worth looking into.   Everyone has different financial goals.  Find yours.  Write them down.  Ask your spouse to sign off on them.

6.  Create a plan.  With your education, tools, confidence, and goals in place, it is time to create the plan.  I call this part being a “money strategist.”  I have written about the process I follow in putting together strategies to achieve financial goals and developing tactics to implement those strategies.  Most money management software tools provide some capability to establish goals and track progress toward those goals.   Again, make sure your spouse understands and buys into the plan.  Write it down to be sure.  In our case, our plan is clearly visible in our use of Quicken so Mrs. ToughMoneyLove can check on it anytime she wants.  She does and often asks questions, allowing us to have some give and take communications about our progress and goals.

For the investment part of your plan, you can look into some of the long term, all weather investment portfolios that others have set up.  There is lots of data on these as well so you must do your due diligence to make sure one of them is right for you.  I have written about these “lazy man” portfolios myself.

7.  Be decisive.  Your plan is in place.  Now it is time to implement it.  I know from personal experience that it can be hard to pull the trigger on major plan moves.  I recall two years ago when I revised our plan, resulting in a significant (as in six-figure) re-balancing of investments in my 401(k) account, including dumping some and adding others.  It was hard for me to make all of those changes at one time but it had to be done.  More recently, when we paid off a mortgage as part of our plan, I hesitated a bit when it was time to send a large amount of our cash to the mortgage company.  But that was our plan and it also needed to be done.  Failure to act has caused a lot of 401(k) accounts to languish and do nothing or worse.  If you are not comfortable making decisions to implement your plan in the real world, go back to steps 1-3 and do some more work.

8.  Stay current.  Financial plans are not locked in stone and will often need updating or fine tuning in response to changes in external conditions.  Some of these changes can be with your family.  Others can be in the economy or the markets.  Even if you have created what you believe is a “set and forget” investment portfolio, part of being your own financial planner means keeping up with external conditions.  I read financial news everyday.  Some of my favorite places to read to stay current are Bloomberg (for national and international financial news), Peter Navarro and Macroblog for economic analysis, and Forbes.com for personal finance news.  I also read dozens of blogs and online financial sites every day and Money, Kiplingers, and Smart Money magazines every month at the library.

Final Thoughts on Planning Your Own Future with Money

If you become successful with your financial planning and acquire some wealth, you will likely reach a point where you will need some professional help with parts of it, such as estate planning or tax planning.  These issues can get complex for high net worth people and you will be out of your comfort zone.  That’s when you hire a pro to help you out, but not necessarily take over.  I think you should stay in charge and I can give you the reason why in two words:  Bernie Madoff.

I like being my own financial planner.  It takes a lot of time but to me it’s worth it.  I am in control, I am responsible, and I can strongly influence our financial destiny.  Give it a try.  Even if you feel like you are “working for the man”, when you are managing your own financial future, it feels much better because now you are “the man with the plan.”

Image credit:  Jonathan Natiuk

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8 Responses to “On Being Your Own Financial Planner”
  1. This article is the exact reason I have always taken charge of my own finances, and why I will always continue to do so.

    I feel more comfortable when I’m in control of my own money, and I don’t have to rely on anyone else.

    Besides, there are a plethora of blogs (including this one) that are really top notch in helping me learn the basics and more.

  2. Matt SF says:

    Really like #4, Getting the Family Involved.

    So many people take on this duty, but fail to realize the significance that a few bad decisions can ruin it for everyone. Plus, a few brains helping you out in the decision making process always helps.

  3. Mr. TML,

    I have always hesitated when pulling the trigger. I usually have to remind myself that I did all the homework, everything looks good, there is no reason not to pull the trigger. ITs still tough sometimes.


  4. I couldn’t agree more. Everyone should read this article. This is especially true given the “diversity” of advice from so-called experts.

    Besides, financial planners can’t be consulted for every financial move. Understanding the topic yourself can insure that you are more likely to make the right decision yourself.

    Plus it’s cheaper. 😉

  5. K-money says:

    Hey, I can create a spreadsheet, use Quicken, and do my own taxes! Maybe I really could do this for myself. Thanks for getting me thinking, and for such a lengthy list of resources.

  6. Debbie M says:

    Not to mention, if you screw up, you feel bad. And then you stop screwing up in that way.

    And even if you’re not as great as you could be, you’ll never recommend something just because it has a good kickback to whoever sells it.

    Also, you pay more attention. You’re likely to notice problems and notice them early on.

    Also, if you steal your own money, leaking it out of your own savings, at least you get to enjoy your tainted purchases.

    Also, some people can just never get your perspective. A friend of mine is just as risk averse as I am, and her financial planner talked her into buttloads of life insurance (and not term life, either, but the expensive stuff) and a lot of other things that give me the creeps.

    If you start out young, you can learn some lessons the easy way, back when you’re still working with small amounts of money.

  7. Bill says:

    Excellent and thorough article.We need to pass more of this ethic onto our kids. Even college-age young adults know little about the world of finance and money.

  8. Tom says:

    Definitely a great idea.
    It doesn’t take much to do your own research plus many of these so-called experts are just sales people.

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