Thursday, October 7, 2010

The First & Most Important Element in Your Financial Plan

The First & Most Important Element in Your Financial Plan: How to make sure your financial house is built on a solid foundation.

Most people agree that planning finances is important. Most agree that if they don't have a financial plan, they would like to have one some day.

Even if you have a financial plan, how do you know if it is built on a solid foundation? That is a critical question and we will explore here how to make sure your plan has a solid foundation.

Let's start with a basic premise. Any structure, including your financial plan requires a sold foundation. Whether a house, building or financial plan, the structure will ultimately fail if the foundation is not solid.

Imagine a pyramid, it looks like a triangle with the point of the pyramid at the top.

The bottom of the triangle or pyramid is the foundation. Because everything rests on the foundation, we want NO risk in that foundation. That foundation must support the entire structure in any kind of situation, storm or trouble. That is why pyramids are built like this and they have certainly withstood the tests of thousands of years.

Unfortunately, most financial plans are not structured this way. In fact, if you turned the pyramid with the top on the bottom, that is how most plans are built. In complex legal lingo, we call such a plan top-heavy. To use more complex lingo, the plan is ass-backwards. The slightest wind or trouble will topple that plan.

How is it possible that such an important structure, your financial plan, could be made upside down? The answer is more simple than you may think. Most plans do not protect against the biggest risks first. Such plans are focused on what to invest in, funding retirement, college education for kids and other similar and important goals.

But such a plan is upside down because they are built on a false assumption. The false assumption is that you will make the money necessary to deposit into the financial plan over the right number of years in order to make the plan work. That length of time is called the plan horizon. The assumption is false because it fails to anticipate that you may not be able to meet the plan horizon due to illness, disability or death.

Said another way, upside down financial plans fail because there is NO foundation. The foundation of any properly constructed plan has to protect against the WORST that can happen first. Not last, but first. A proper plan must first assume that you will not meet the plan horizon and have contingencies built into the plan that will still allow the plan work as intended.

We get now to the first and most critical step in any financial plan: estate planning. You read that right, estate planning. The first step in building your financial plan is to START with your estate plan. This is because your estate plan is about protecting against the worst risks first. Your estate plan is what protects your blind side.

I won't cover here the elements of a proper estate plan here, you can read about that elsewhere here on my blog. Suffice it to say though, that your estate plan covers YOU, your loved ones and your property if anything happens to YOU. A proper Will, perhaps a trust for the kids, Durable Powers of Attorney; a Living Will; proper beneficiary designations, life insurance, health insurance, proper auto and home insurance, and disability insurance are all important pieces of this foundation.

Don't let your financial plan fail because it is built upside down. Make sure that your plan is built on a solid foundation of your estate plan. Insist that you and your loved ones be properly protected. Remember, friends don't let friends drive with an upside down financial plan. Don't let your own plan be hazardous to your family and your wealth.

Bernie Greenberg


  1. Absolutely outstanding, thank you so much!

  2. Good post and I agree with what you had to say. Let me take a slightly different track as a practicing, experienced financial planner. The most important element in doing a financial plan for a client is to help the client articulate their vision for what they want their life to be like in the future. What are their goals, their hopes, their dreams. I have found that once we are able to define this, everything else flows. A solid foundation, certainly key but in my opinion not the first step.


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