The Certified Financial Planner Board of Standards Inc. (CFP) defines financial planning as “a process of determining whether and how an individual can meet life goals through the proper management of financial resources.”1
I have always had a problem with this definition. It is too vague. What does the “proper management of financial resources” really mean anyway? And as far as life goals are concerned, few write down their long-term goals. Even fewer are able to achieve them. Just think about the last time you made a New Years Resolution and honestly stuck with it? See my point?
A much more practical way of approaching financial planning is to put it in terms that anyone can understand. Here’s my definition of financial planning:
“The process of helping individuals organize and understand their financial life; necessary for making sound financial decisions.”
When I was younger, the most complicated decision I had was whether or not to wear my hat when bike riding with my twin sister Susan. (picture above)
Yes, those were the days. Decisions have become much more complicated. In part, because the financial landscape has become much more complicated. And let’s face it, complexity is dangerous to financial health.
There are many theories on optimizing our decision-making ability. Ben Franklin suggested making decisions by drawing a line down the middle of a page and listing the pros and cons on either side. But is creating a pro and con chart the best method for making important financial decisions?
“The problem, simply put, is that we cannot choose everything simultaneously. So we live in danger of becoming paralyzed by indecision, terrified that every choice might be the wrong choice.” Elizabeth Gilbert, Committed: A Skeptic Makes Peace with Marriage.
I agree with Ms. Gilbert. Often, the financial landscape looks like too many decisions that only lead to confusion and indecision. So, to make financial planning simpler, I have created a three-step decision-making process called MoneyCapsules®, which I use as the framework for my Sound Financial Decisions platform.
My mantra? Organize. Understand. Decide.
What our clients tell us is that by organizing their financial life into 7 parts: Values-Cash-Risk-Tax-Time-Giving, they find it easier to understand what’s working and not working. Then, making a decision becomes a lot more doable once they see how the different parts of their financial life fit together.
Many people tell me that they appreciate having this repeatable, step-by-step process to navigating their financial decisions. The reason being, money is tied so closely to our personal lives and feelings, that most people struggle to neutralize their emotions to easily make clear-cut decisions.
Perhaps Mr. Franklin was able to manage his emotions and make sound decisions using his pros and cons analysis method. But I wonder if his method would have sufficed when making financial decisions. A simple pros and cons analysis is too vague and may neglect the emotional issues that often accompany money matters.
I think about Franklin’s legendary kite experiment in which he flew a kite with an iron key into a lightning storm and produced an electrical spark. When we start trying to make rational financial decisions, it’s like flying a paper kite amidst a storm of emotionally-charged, irrational behavior—then the sparks really start to fly.
There needs to be a clearly-defined way to help us navigate through the financial-decision-making process. I propose we Organize. Understand. Decide.