(HawaiiNewsNow) - We hear a lot of talk about financial planning and planning for the future. But how does the financial planning process actually work and how can this process help me in the long run? Here to talk more about financial planning is Bank of Hawaii Vice President Rob Sanford.
What exactly is financial planning?
Financial planning is the process of bringing the future into the present. And what most people don't know if that they already have a financial plan - a plan either by design or by default (failure to plan).
What does financial planning means in terms of savings and investment?
When someone is saving and investing money, ultimately what they are doing is deferring their spending. Almost no one saves and invests purely for the academic exercise or curiosity. People save and invest so that they can spend money on something, sometime in the future.
How does the financial planning process work?
The process should be integrative and holistic. Your financial planner should not recommend a loan, investment or any other financial instrument or strategy in isolation. A financial planner should know and understand the client's overall financial objectives and goals so that action can be taken to achieve each goal.
You say the process should be integrative and holistic. Can you give us an example of this type of process?
Let's say you want to buy a house so you look into taking out a mortgage. While you might qualify for the loan, this financial obligation could possibly prevent you from meeting other financial goals. So yes, you can finance the house, but will you have enough money put aside for your child's college tuition or to be able to retire at the age you want to? Your financial professional should discuss with you not only about financing the house (an isolated issue), but also about funding your life's goals.
So should only people who have a lot of discretionary income go to see a financial planner? Or would everyone benefit from financial planning?
Some people have the notion that you need to have a lot of money to go and see a financial planner. But that's not the case. We never know when a financial crisis or mishap is going to happen and we should always prepare for them. If a financial mishap happens to someone with very little discretionary income, that mishap could be very costly and could take awhile to recover from. Whereas, if a mishap happens to someone with a significant savings account, they might not even notice the mishap or the recovery would probably be quicker. So it's very important for everyone to have a plan in place.
Can you give us an example of how financial planning might help a family today?
Let's look at a family of four, which includes a 5-year old daughter and a 3-year old son. What long-term goals would this family have? Would they want to send their son off to college? Pay for their daughter's wedding? If the family follows the 'default' plan of 'no planning', they may or may not be able to accomplish these goals. However, if the 'designed' plan is followed - the result of the financial planning process, these goals will more than likely be accomplished. The family can start saving and investing today so that 20 years from now, they will have the money to spend on these goals.
Any last thoughts on making financial planning work?
The best financial planning is advisory, not transactional. The experience should be goal-centric and not product oriented. When looking for a financial planner, look for someone who will focus on your goals first. Only after your goals have been established then go to the marketplace to find the products that will help you achieve your goals.