In large part, just about everyone believes that a financial plan is a good thing.
Having a plan with your money, career, and retirement is important. Without a plan, how will your goals get accomplished?
I often like to use the idea with clients that EVERYONE has a plan. Some have a plan to succeed, others claim to have no plan, however, in all reality, they do have a plan. Unfortunately, their plan is to fail.
You see, reaching your goals in life takes direction. You wouldn’t go on a vacation across the country without a map or try to build a house without blueprints.
Yet, I see so many federal employees going through their career and into retirement without any idea of what their finances look like. Their accounts are spread out all over. Many are living paycheck to paycheck. And even more, haven’t a clue on when/if they’ll even be able to retire.
This is a problem.
Thankfully, though, this issue can be corrected. Not only can it be corrected, but it can be done rather easily, given the right amount of time and effort.
Today, I’m going to go over 10 reasons why every federal employee needs a financial plan.
Now, I know what you’re thinking.
“HA, a financial advisor telling me I need a financial plan. Isn’t that like a surgeon telling me I need surgery?”
Yes, it pretty much is. However, where the surgeon is the only person who can provide surgery to you, a financial advisor isn’t the only person who can help with a financial plan.
In fact, you could create a substantial financial plan on your own. I would never deny that.
That said, many financial advisors have the knowledge and expertise to not only speed up the process but also optimize the outcome.
Many like myself spend thousands of dollars each year on training, software, and education to better help their clients. Even more so, there’s a few of us (very few) who specifically focus on helping federal employees.
Whether a financial advisor is used or not, a financial plan will help in many areas of your life. Unfortunately, only about 19% of financial decision makers say they have a comprehensive financial plan according to the 2013 Household Financial Planning Survey. A comprehensive plan covers savings and investments; planning for retirement, education, emergencies, major purchases, and other financial goals; and insurance needs.
There are likely many reasons for this. However, the mains one I see are due to a lack of effort and the perception that financial plans are expensive.
According to my one of my personal favorite books on finances, “The Millionaire Next Door” prodigious accumulators of wealth spend an average of only 8.4 hours per month planning their investments. Under accumulators of wealth spend an average of 4.6 hours per month.
There is, without a doubt in my mind a difference between the amount of money those that spend time on their finances end up with, and those who neglect to put in the effort.
To further my point, here are ten reasons you, as a federal employee, need a financial plan.
1. A financial plan helps define your goals.
A big part of financial planning is figuring out exactly what your goals are.
Without something to shoot for, there’s not much of a reason to put a plan together. Goals can be as simple as being able to retire at 62, or as complex as being able to retire in your forties. (It happens, and I’ve interviewed a federal employee who’s done so here →)
For married couples, going through a financial planning process is most beneficial at getting both partners on the same page. Don’t spend more time each month figuring out where to eat on the weekend than you do on planning your retirement.
2. A financial plan will help you allocate your spending to meet your goals.
Once you have a good idea on where you’re going, you can begin to look at your cash flow.
Cash flow is an important tool to determine whether you’re spending too much, and what areas that money is being spent.
There’s virtually no way to reach your goals if you have negative cash flow. It may mean you need to pull back some on your TSP contributions or make other adjustments. Just as oxygen is life to your body, positive cash flow is the oxygen to your finances.
If you’ve never looked at where your money is being spent, it would most likely surprise you. I’ve seen people who had no clue they were spending hundreds of dollars a week eating out, not to mention the surprises people have when they see their Starbucks habit is eating up their opportunity at an early retirement.
Don’t let the short-term comforts in life take precedence over your long-term goals.
3. A financial plan will show you which of your goals are realistic, and which ones need refining.
Once your goals are taken into account, whether with a financial planner or by yourself, you can start to see how to get there.
- how much you’ll need to save.
- how aggressive in your investments you’ll need to be.
- what your spending will need to look like.
Most of us have many more goals than we have time or money. Having a bucket list is great, but you’re going to need the money and time away from work to knock those items off your list. Unfortunately, most people who spend time away from work, are typically away from making money. It’s an unfortunate paradigm.
I like to say that any goal is within reach, just not all goals. Part of planning is deciphering between which goals are most important, and those you can live without.
Saving for your child’s education, buying a home and retiring all take years of effort and planning to accomplish.
4. A financial plan will help you measure your progress.
We live in the age of data. Nearly everything you do is tracked, whether you like it or not.
The phone calls you make, the miles you drive, and the money you spend. This data, although at times creepy, can help you to reach your goals if used in the right manner.
Using software in accordance with your financial plan, you can follow-up on the goals you set and how you’re meeting them.
For instance, a goal may be to contribute 10% to your Thrift Savings Plan. Using software, you’ll be able to look back and see whether or not you stuck to that plan and how you can improve going forward.
5. A financial plan will help identify mistakes you’re making.
One of the biggest mistakes people make is overspending.
The problem is we live in a society in which everything is at our fingertips. Although this can be a great thing, at times it can be difficult to know when to say no. Although this mistake is seen vividly when looking at cash flow, there’s also other errors that can be fleshed out through a financial plan.
Mistakes like paying down debt in the wrong manner or just not investing money in the right places, can all be revealed through a financial plan.
6. A financial plan will help you maximize your money.
Everybody wants to maximize their life.
Federal employees want to maximize the time they’re able to spend with their family, their TSP contributions, their benefits, as well as just their career in general.
Taking a look at your finances, and in particular, with the help of an outside expert, you’ll be surprised at just how inefficient you may be spending money.
Many federal employees are not taking advantage of all the great benefits that are offered to them. Whether it be FEHB, FEGLI, the TSP, or any others. One of the BIGGEST federal employee retirement mistakes is not contributing enough to the TSP to receive the match. It’s practically a 100% automatic rate of return.
There’s also various ways to save on taxes such as contributing to a flexible spending account or making contributions to different accounts.
7. A financial plan will identify risks you’d never even considered.
One of the most important parts of a financial plan is in its ability to help determine your capacity for risk.
People rarely think about what they would do should be unable to provide for their family. Things like disabilities, sudden illnesses, or even death all need to be factored in when making financial decisions.
Think about this, what would happen to you if you were suddenly unable to work? How would your mortgage get paid off or any number of your other expenses?
Will’s and Power of Attorney documents are way too often overlooked and not just for federal employees. Depending on your state, if you die and your name is the only one on your assets, half of those assets would go to your parents, not your spouse.
Nobody wants that to happen unless specified.
8. A financial plan will give you more confidence about your finances.
Running around without knowing how much money you have coming in and going out is a recipe for unnecessary anxiety.
The graph above shows people who label themselves as “Confident Savers” being the most confident in their retirement savings. Those same people are the highest category who use professionals like financial planners and CPA’s to help them with their money.
When you know what’s going on with your finances and how your retirement is going to look, you’re much more likely to have confidence.
Confidence is the opposite of worry. So if you’re worried, it may be time to have a plan in place for your finances.
9. A financial plan can help you build wealth.
Having a financial plan is likely to help you build wealth.
Think about it; if you know where your money is going, you have more opportunity to make it work for you.
According to a 2012 CFP Board Survey, those with a plan have more money saved and are more likely to pay off their credit card bills in full.
Planners save, non-planners spend. Be a planner.
10. A financial plan can help you become more comfortable.
Being behind on savings goals is uncomfortable, there’s no doubt about it.
Confident savers, (those who are the most likely to have a financial plan) are the most likely to be ahead in meeting their retirement savings goals.
It seems like there’s this idea among many federal employees that they have to live paycheck to paycheck. That’s simply not the case.
When you have a plan in place, you’ll be more comfortable and more likely to accomplish your goals.
What has stopped you from creating a financial plan or using a financial planner? Let me know in the comments!
– Cooper Mitchell