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4 Ingredients to a Successful Financial Plan

November 1st, 2011 Leave a comment Go to comments

How can you succeed with your financial plan? Consider these four ingredients below.

For many people, planning their finances can seem complicated, daunting and just plain boring. No one wants to spend too much time on it. It’s like asking: do you want to spend your vacation time on the beach or time in the car or plane getting there? Obviously, you would want to be on the beach. But, traveling to get there is still required nonetheless.

In the same way, your financial goals can be realized more successfully if you spend some time planning them. All of this advice can be summed up with a simple idea: become your own Chief Financial Officer (CFO). As an executive, you will not be expected to know all the details or even know what the answers are, but more importantly, knowing what questions you need to ask. One of the main goals of this site is to help you learn about what you need to ask so that when you do seek professional advice you can be a better executive.

Here is a story about a past governor of Minnesota which demonstrates this concept well. Jesse Ventura was elected governor of Minnesota in 1998 in an improbable election as a third party candidate. There were many skeptics that questioned his ability to lead the state – he previously was a professional wrestler (these skeptics sometimes left out his years as a state legislator). In many interviews that he gave after the election he was often asked why he felt he was qualified to be governor. He gave this answer (paraphased):

“As governor, I serve as the CEO of the state, I will hire the best people to run state agencies and give them the authority to carry out my policies.”

This is good advice not only if you are a governor. Details are important, but as the executive you need to set out what your “policies”  or goals are.

Creating The Plan

This is the most important ingredient, creating the plan. A plan that is never explicitly stated and quantified is less likely to succeed. First, write down what your goals are. It does not have to be detailed with numbers, it can be a dream like, “I want to live at the beach full time when I am 50 years old”. Next, write down all the components of the goal that you believe will require some attention in your plan. If, e.g., you need to fund a college education this might include things like access to financial aid, scholarship opportunities, investment accounts, and the likely type of education (college, trade school, university) expected.

Next create an action plan for each component. Some details of your components may seem daunting (navigating the web of college financial aid options is complicated enough by itself). Just because one aspect is complicated or overwhelming is not an excuse to ditch the plan. Seek out advice either through books or the many online resources (many are free). Or, if you are still overwhelmed seek out professional advice for those areas where you need the help.


What’s the secret to financing your future goals? You may think it’s some of the following. These are important, but not the most critical ingredients.

  • Being at least knowledgeable or an expert at the details.
  • Asset allocation.
  • Return on investment.
  • Type of investment account (Taxable Brokerage/IRA/529 plan/401K).
  • Tax Benefits.
  • How smart your Financial Planner, Mutual Fund Manager, etc. is.

One of the unfortunate statistics that investment professionals know too well, is that investors typically do not earn the stated returns on their mutual fund investments. This is primarily due to a lack of discipline; investors may stop investing consistently along the way, or they may make rash decisions about buying and selling at inappropriate times.

One investment professional has written extensively about this issue on his blog, the Behavioral Gap. After some years as an investment professional seeing what investors actually do with their money, he documents that extent of the gap: an average 7% difference!

Once you have embarked on your plan, stick to it. Fortunately, discipline can be automated today using many financial tools that can help you stick to your plan.

Margin of Safety

Borrowing an idea from the great value investor Benjamin Graham, always factor in a margin of safety. When looking for investments, Graham would determine a fair market price based upon past performance and his assumptions about the business going forward. After all the calculations were completed, he added in a margin of safety (a lower buying price – perhaps 25-50%). This concept can be used for other financial plans, not only investments.

After your have done your research, made your assumptions and estimated all the numbers, add a margin of safety. There will be things that you can’t know or predict easily as well as changes in your assumptions that will occur long the way. A margin of safety will help to temper your expectations and provide a more realistic outlook. And if the plan eventually succeeds more than you expected, all the better.

Don’t Try To Be Perfect

If you have followed how the political bodies study issues and how their proposals become bills and eventually law, it is quite messy. It often times has been compared to how sausage is created. The point to take away from this is that if you wait for the perfect time to save, to invest, and plan your finances it will never happen because there is never a perfect time.

You probably have short term issues to deal with as well as many different goals each requiring your attention and resources. Even if you can only satisfy 20% of a goal because that’s all you can manage right now, this is still better than doing nothing.

Also, there are fairly well known rates of return on investment for different types of instruments. You might be tempted to look for that ‘perfect investment’ which may offer the opportunity to juice your returns. Instead of taking additional risks, follow more conservative strategies that have a high success rate – take risks using other funds that you can afford to lose.

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