2750: The Four Pitfalls of Financial Planning by Lisa Whitley with Women Who Money on Personal Finance

[00:00:00] Looking to part ways with complicated, expensive, and uncertain shipping?

[00:00:04] Then give your business the edge it needs with USPS Ground Advantage Shipping from the United

[00:00:10] States Postal Service. Keep everything simple with clear, upfront pricing and no unexpected

[00:00:17] surcharges. Keep things affordable with some of the lowest prices out there. And keep it all

[00:00:23] reliable with on-time ground shipments. It's time to turn shipping to your advantage. Learn how at

[00:00:30] usps.com slash advantage. USPS Ground Advantage. Simple, affordable, reliable. With supply chains

[00:00:42] becoming more complex, you need to stay on top of the latest logistics developments. So if you

[00:00:47] work with logistics, you need the Beyond the Box podcast from Maersk. It's the easy way to keep up

[00:00:53] to date with everything from digital disruption and logistics to the need for supply chain

[00:00:57] resilience in today's market. Find out more and keep ahead of the game with the Beyond the Box

[00:01:04] podcast on Logistics Insights at Maersk.com slash insights. This is Optimal Finance Daily,

[00:01:11] episode 2750. The four pitfalls of financial planning by Lisa Whitley with womenwhomoney.com.

[00:01:19] And I'm your host and personal finance enthusiast, Diana Merriam. Now let's get right to it.

[00:01:25] So let's get right to it and continue optimizing your life. The four pitfalls of financial planning

[00:01:35] by Lisa Whitley with womenwhomoney.com. Quote, if you don't know where you're going,

[00:01:42] you'll end up someplace else. Yogi Berra. This without question is my favorite quote about

[00:01:50] planning. It encapsulates as only the great baseball coach and manager could, the very first

[00:01:57] not having a plan at all. But that's not you, right? Common mistakes in financial plans.

[00:02:04] You have goals, you have priorities, you have a plan. And yet, number one, does your plan

[00:02:12] jump to a solution without addressing the root cause of the problem? It's disturbingly common

[00:02:18] in personal finance to conflate a specific tactic, a great money move everyone should make today

[00:02:25] headline with an actual enduring answer to a financial problem. For example, you have high

[00:02:31] interest credit card debt and your plan is to refinance the debt at a lower rate. Could be a

[00:02:36] credit card balance transfer, a debt consolidation loan, or even a home equity loan. Refinancing will

[00:02:43] lower your overall interest costs and allow you to get out of debt faster. That sounds like a

[00:02:48] solid plan, doesn't it? But what if you haven't changed your spending habits that led to the debt

[00:02:53] in the first place? Are there long lasting, perhaps even challenging choices you need to make

[00:03:00] on either the income or spending side to address the root cause of your debt problem?

[00:03:05] If you haven't addressed the underlying reason you have high interest debt, refinancing will

[00:03:10] likely not lead to being debt free in the long term. Number two, does your plan overlook sources

[00:03:17] of risk in your financial life and then fumble the response? Stepping back, when we encounter any

[00:03:24] risk in our lives, we have several ways to respond. We can simply ignore the risk, transfer the cost

[00:03:31] of the risk to someone else or accept the consequences of the risk ourselves. When we

[00:03:36] purchase health or auto insurance, that's an example of transferring the economic risk of

[00:03:42] car smash up to someone else, that is an insurance company. When we raise the deductible on our

[00:03:49] homeowner's insurance policy, we consciously absorb more risk ourselves while still transferring much

[00:03:56] of the financial risk of our home suffering damage. But what about the risk of becoming

[00:04:01] disabled and unable to earn any income? According to the Social Security Administration,

[00:04:07] one quarter of 20 year olds today will experience a disability sometime during their working years

[00:04:13] and the causes of disability may not be what you think. The four most common reasons why a worker

[00:04:19] becomes disabled and at least temporarily unable to work are musculoskeletal disorders, tendinitis,

[00:04:27] arthritis, etc., cancer, pregnancy and mental health issues. What is the proper response if

[00:04:35] this is now on your radar as a real risk? As in the previous pitfall, don't immediately jump to

[00:04:41] the solution that seems most obvious, in this case disability insurance. If you have a healthy

[00:04:47] emergency fund or a second earner in your household, you may feel quite comfortable

[00:04:51] absorbing some of the risks yourself. Self-insuring at least for the short term and purchasing long

[00:04:58] term disability insurance may be your ideal solution. But what about the risk of losing

[00:05:03] your side hustle income? According to a recent study, about 25% of American workers have some

[00:05:10] amount of non-standard income from work such as freelancing. For lower income households,

[00:05:16] the percentage is much higher. Is the pay you earn from self-employment or even overtime at

[00:05:21] your primary employer truly extra or is it integral to meeting your day-to-day expenses?

[00:05:28] If the latter, how are you factoring the possibility of losing that side income into your plans?

[00:05:35] The possibility of incurring tremendous expenses for long-term care at retirement age is an area

[00:05:41] where many people, quite understandably, prefer to simply ignore the risk altogether. Yet we know

[00:05:47] from research that the average cost of long-term care could be as much as $172,000 over a lifetime.

[00:05:55] Identifying the optimal response to this risk, transfer, that is buy a long-term care insurance

[00:06:01] policy, rely on Medicaid or self-insure, that is amass extra savings, will require a fairly deep

[00:06:09] analysis of your realistic options. A retirement plan that's blind to this risk is not a plan worth

[00:06:15] having. This is a complex decision you may want to make with the guidance of an experienced

[00:06:20] financial professional. 3. Does your plan see the trees so clearly

[00:06:26] that the forest is completely missed? This pitfall can derail your financial plan in a myriad of

[00:06:32] ways. For example, perhaps you've heard the phrase, don't let the tax tag wag the investment

[00:06:39] dog. Of course, all things being equal, you would enjoy paying less in taxes than more.

[00:06:45] When things go awry is when, in an effort to optimize your tax position to the nth degree,

[00:06:51] you lose sight of the actual goal. Are you putting 100% of your long-term savings in a

[00:06:57] tax-advantaged retirement account, overlooking the benefits of flexibility and having penalty-free

[00:07:03] access to some of your savings before the age of 59 and a half? Or letting tax considerations drive

[00:07:09] short-term trading decisions rather than a deeper understanding of your investment philosophy?

[00:07:15] But this pitfall rears its head in other ways as well. Was your decision to buy a house driven by

[00:07:21] the numbers completely ignoring the lifestyle implications? As well, there's the too-tired-for-

[00:07:27] words latte budget example. Is your financial plan so focused on tracking the minutiae of

[00:07:33] your daily spending that you've ignored the factors really driving your financial crunch,

[00:07:38] your rent or mortgage, car payment, or even your salary? And number four, does your plan ignore

[00:07:46] what makes you you, the personal biases and quirks that affect your financial behaviors?

[00:07:52] Your financial plan, developed on the left side of your brain, envisions you saving dutifully for

[00:07:58] retirement or a house down payment. Alas, the right side of your brain has other intentions

[00:08:04] that include an overseas vacation. Your investment strategy may be to stay firm in equities for the

[00:08:10] long haul, except you shutter and sell at the first sighting of a bear market. Or conversely,

[00:08:17] your irrational exuberance for the next big thing leads you to consistently go off script in search

[00:08:23] of a better idea. Automation, auto-investing, and auto-rebalancing, dear listener, must be part of

[00:08:30] everyone's financial plan. More broadly, you must know thyself and have a financial plan

[00:08:36] incorporating tactics to save you from your own worst habits and negative financial decisions.

[00:08:43] Closing thoughts. A plan is rarely, if ever, perfect. Still, the wrong strategy can leave

[00:08:49] you someplace you don't want to be. Review and monitor your financial plan regularly to avoid

[00:08:55] these four common mistakes. Addressing your plan as life changes will ensure it keeps up with your

[00:09:02] dreams and money goals, and provides financial security for your future needs. You just listened

[00:09:11] to the post titled, The Four Pitfalls of Financial Planning by Lisa Whitley with womenwhomoney.com.

[00:09:18] And I'll be right back with my commentary. It goes without saying that a lot of people don't

[00:09:23] know where to start when it comes to investing. Many think you need a lot of money to invest.

[00:09:28] Some put off investing because it doesn't seem urgent. Acorns makes it easy to start automatically

[00:09:33] saving and investing for your future. You don't need a lot of money or expertise to invest with

[00:09:38] Acorns. In fact, you can get started with just your spare change. Acorns recommends an expert-built

[00:09:44] portfolio that fits you and your money goals, then automatically invests your money for you.

[00:09:49] And I love Acorns because I feel that this type of automation is exactly the boost needed for

[00:09:54] the many people who like the idea of investing, but haven't felt ready to begin for whatever reason.

[00:09:59] So head to acorns.com slash OFD or download the Acorns app to start saving and investing for

[00:10:06] your future today. Paid non-client endorsement may not be representative of all clients. Tier

[00:10:11] one compensation provided. Compensation provides an incentive to positively promote Acorns.

[00:10:15] View important disclosures at acorns.com slash OFD. Investing involves risk, including the loss

[00:10:21] of principal. Please consider your objectives, risk tolerance and Acorns fees before investing.

[00:10:26] Acorns Advisors LLC. Acorns is an SEC registered investment advisor. Brokerage services are

[00:10:32] provided to clients of Acorns by Acorns Securities LLC. Member FINRA SIPC. For more information,

[00:10:38] visit acorns.com. Looking to part ways with complicated, expensive and uncertain shipping?

[00:10:45] Then give your business the edge it needs with USPS Ground Advantage shipping from the United

[00:10:51] States Postal Service. Keep everything simple with clear upfront pricing and no unexpected

[00:10:57] surcharges. Keep things affordable with some of the lowest prices out there and keep it all reliable

[00:11:04] with on-time ground shipments. It's time to turn shipping to your advantage. Learn how at USPS.com

[00:11:12] slash advantage. USPS Ground Advantage. Simple, affordable, reliable.

[00:11:20] This article reminded me why crafting a financial plan requires a bit of discernment. While there's

[00:11:27] a ton of great financial knowledge to take into consideration, the thing that matters most is

[00:11:32] considering how that guidance may or may not apply to your specific situation. Instead of following

[00:11:39] a one-size-fits-all approach, it's essential to tailor your plan to fit your specific circumstances.

[00:11:46] Common financial goals like paying off debt and saving for the future are universal, but there

[00:11:52] are many different roads that lead to the same destination. Also consider that a financial plan

[00:11:58] isn't a static document. It's a dynamic process that requires regular review and adjustment.

[00:12:04] Life circumstances change, goals evolve, and external factors impact your finances.

[00:12:11] Being proactive and adaptable ensures that your plan remains relevant and effective over time.

[00:12:17] So when crafting your financial plan, take a thoughtful and personalized approach.

[00:12:22] By paying attention to the nuances of your financial situation and staying flexible,

[00:12:27] you'll build a plan that aligns with your unique needs and aspirations.

[00:12:32] But that'll do it for today. Thank you for being here and listening every day,

[00:12:35] and I'll see you tomorrow, as usual, where optimal life awaits.