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By Dr. Jim Dahle, WCI Founder
Many a financial advisor will tell you that their new clients have gaping holes in their financial plans. However, that usually isn’t why they come to see the financial advisor. A client often comes in looking for help selecting investments. Investments are sexy. People love to think about having great returns and even more money than they already have. Investing can seem really complex—so complex that one must hire a professional to assist.
However, that is actually one of the largest misconceptions in the financial world (two others are that you get what you pay for in financial services and that the more active managing you do, the better your returns will be). An even bigger problem with a huge focus on a complex portfolio is that it sucks up all of your time and energy. Keeping investing simple will give you the bandwidth to focus on the things that will have a much bigger impact on your financial life.
Ahhh . . . the majesty of simplicity.
10 Biggest Gaps in Financial Plans
Today, let’s go over what people forget. What they ignore. What just doesn’t show up in their financial plan, if they have one at all.
#1 Disability Insurance
It’s amazing how many doctors are still running around without disability insurance. But you know what? Outside of medicine, it’s far worse at 14%. That’s right, only 14% of Americans are covered by a disability insurance policy. Want an even worse statistic? In 2012, it was 31%. No, I have no idea what happened. Fix this gap in your financial plan by purchasing a solid disability insurance policy. Protect your greatest financial asset (your ability to turn your time into money at a high rate).
#2 Life Insurance
Doctors can simultaneously buy too much of the wrong kind of life insurance (whole life because it seems more like an investment) and too little of the right kind of life insurance (term life). It might not be a huge gap in YOUR financial plan, but it sure will be a big part of your survivor’s financial plans!
#3 A Will
The most important function of a will is to designate someone to take care of your kids and their finances in the event of your death. So, you have kids but no will? Seems like kind of a big gap, right? Go get a will.
More information here:
My Financial Plan Calls for Me . . . Being Hung by My Fingernails????
With Our Expanding Family, We’ve Had to Break Our Financial Plan – Twice
#4 Beneficiary Designations
Remember when you opened that IRA, HSA, 401(k), or 529? They asked you to designate some beneficiaries. Guess what? Not everyone did. Or maybe they didn’t change the beneficiaries after getting a divorce or after some other life change. It doesn’t cost anything and it usually doesn’t take very long, but it’s a pretty important part of financial planning.
#5 Your Income
People don’t like talking about their income. The natural consequence of that is that there is a very wide range of incomes for the same or similar jobs. The intraspecialty pay variation dwarfs the average interspecialty pay variation. Knowing what you’re worth and getting it is a big part of financial planning. Better yet, figure out what the top 10% of those in your field are doing to have such a high income and borrow some of their techniques.
#6 Your Budget and Savings Rate
Budgeting seems like a pretty basic part of financial planning, right? You might be surprised how many of your peers, many of whom have a financial planner, can’t tell you what their savings rate is. Of all the numbers to keep track of early in your career, this one has to be near the top. It’s not even hard to calculate. Take all the money you put toward retirement this year and divide it by your gross income. That’s it.
More information here:
How to Write an Investment Policy Statement
#7 Goals
Want to have even less fun than you’ll have budgeting? How about setting goals? This one is apparently so hard and/or so painful that lots of people try to invest without doing it. Seems hard to me. I mean, what’s the point of investing without any sort of a goal? How does anyone even know what to invest in if you don’t know what the money is for or when it might be used?
#8 Credit Card Debt
Sixty-one percent of Americans have credit card debt. Sixty-one percent of Americans report that they own stocks, so presumably, something like 70%+ of Americans are investors. That means that at least 30% of Americans are investing despite having credit card debt. Credit card debt, typically at 15%-30% interest rates, is by far the best guaranteed return investment available to 61% of Americans. Investing in pretty much anything before paying off credit card debt is one of the dumbest things an investor can do.
#9 No Mortgage Plan
Many investment advisors don’t take into account the presence of a mortgage when they give advice. Perhaps the investment portfolio includes a bunch of bonds paying 3% while a 7% mortgage is sitting there. Or the mortgage should have been refinanced years ago. Or the mortgage is actually what is keeping someone from retiring. People always wonder, “What will I do for health insurance if I retire early?” Well, you could always use the money that was going toward the mortgage to pay for it if you had paid off that debt. The point is that a mortgage is a huge piece of most people’s financial lives, and ignoring it in a financial plan is a mistake.
More information here:
Should You Pay Off Debt or Invest?
#10 No Student Loan Plan
It’s really sad that student loan burdens are so high and that the student loan landscape is so complicated that this now must be a major part of the financial plan of many people, especially doctors. After we started StudentLoanAdvice.com, we found that just providing some education and a little help running the numbers saved doctors an average of $190,000 on their student loans. Like managing a mortgage well, managing the costs of education well goes a long way toward a sound financial plan.
Fill these gaps in your financial plan, and you and your finances will be a lot happier.
What do you think? Which of these gaps do you think is most common? Which ones do you still need to fill? Comment below!
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