Financial planning 

According to the Certified Financial Planning Board, a non-profit organization that seeks to protect public interest by establishing, fostering and enforcing the rigorous standards for CFP® certification, financial planning is:  “the process of determining whether and how an individual can meet life goals through the proper management of financial resources.” I think this definition captures the financial planning process, but not necessarily its power. As oftentimes in literature, fiction (ironically) reflects reality more accurately than non-fiction as real life is often complicated and nuanced. This is the case with personal finance wherein metaphors sometimes do a far better job of illustrating power over process.

Financial planning and sailing   

When women ask me what financial planning is really, I often illustrate with a sailing metaphor.  You can think of your boat as your collective “stuff”: home, cars, clothes, loans. Your goals (e.g., buying a home, putting kids through college, retirement at a certain age) are your destinations and the clarion that calls you out to sea every day to work. If you’re like most people, you rely on your labor (aka job) to row your boat to your various destinations. This method typically requires a good deal of effort, energy, and time. Still, this is what most people default to when they choose a lifestyle that requires them to constantly row, row, row.

Within this context, financial planning maps out the best course for getting you to your destinations by taking into account the size of your boat, your labor and the distance between destinations. Within this context, money is your sail. Sadly, if you’re like most people, you don’t fully understand and, therefore, don’t fully take advantage of your sail. As a result, you’re not able to harness the wind and so must continue to rely on your own rowing to power your journey. By living paycheck to paycheck, you can keep your boat (tenuously) afloat, but not necessarily move it forward in a meaningful way.

Learn to sail

Rather than inching towards your destination, consider developing a bigger sail. First, find ways to cut your expenses so you can start saving (more). Second, once you have enough money in your emergency fund (e.g., typically 6-12 months in living expenses for single women), start putting extra savings into retirement accounts (e.g., 401k, IRA, SEP IRA, 403b). These tax-advantaged accounts instantly amplify your savings by:

·       Allowing you to deduct your contribution from your income and, thus, providing you an immediate return on investments in the form of tax savings.

·       Enabling your money to grow tax-deferred, so you don’t have to pay taxes on the principal or capital gains until you withdraw the money after reaching age 59 ½. This helps ensure that your “snowball” of savings continue to grow as quickly as possible.

·       Providing you with an employer match, which is also an instant return on your contribution.

Row less, sail more

In the beginning, saving and investing money in retirement accounts may feel like collecting water one droplet at a time. However, if you are consistent, you will soon see your account balances grow. As your retirement/savings accounts get bigger, your proverbial sail also gets bigger. Thus, it will start picking up more wind (via compounding), which will help power your boat forward more quickly and effortlessly. Increasingly, rather than devote much of your labor to rowing, you can now shift your efforts to steering.

Additionally, if you want to get to your destinations even more quickly, consider downsizing your boat. A smaller boat requires less sail to power it forward. So, a small boat with a big sail is the fastest way to get to where you want to go. Keep in mind, however, that neither your boat size nor sail size can shield you completely from the choppy waters inherent in the stock market and in life.

Would you rather row or sail?

 Most people get so caught up in buying a big(ger) boat that they lack the resources to develop a bigger sail. As a result, they unconsciously consign themselves to a lifetime of rowing, sometimes longer than they are physically able. However, for those who want to get to their destinations more quickly and effortlessly, a small boat with a big sail is the best way to travel. Financial planning is more than charting the best course to get you from A to B.  Rather, it’s about teaching you how best to harness the power of money (and the wind) so that you can sail to wherever you choose. That’s true freedom; that’s real power.

 

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