Financial Modeling Still Matters—Show Me The Numbers!
“In preparing for battle, I have always found that plans are useless, but planning is indispensable.”
Despite significant advances in computing capabilities, I've noticed the financial planning community moving away from computer-generated financial modeling in the past decade. In part, I think this shift is a good move.
Early in my career, many financial planners would sell computer-generated financial plans, as opposed to selling the benefits of their strategic "planning" abilities. They thought their primary value was constructing thick books of complex spreadsheets built upon numerous assumptions and applying compound interest to multiple variables. As one of my co-workers liked to say, the plans should have been footnoted with the caveat "these projections are guaranteed to be wrong."
Financial Modeling Shouldn't be Ignored
Today, there is a greater acknowledgment of the value that a good advisor can add to the "soft side" of financial planning, such as clarifying goals, providing encouragement and discipline, acting as a gatekeeper against shoddy financial products, and facilitating in-depth conversations about one of the most emotionally-charged subjects: money.
Of course, it has also been shown that there is great opportunity for a good advisor to add value by coaching clients through market manias and panics, to avoid the much talked about "Behavior Gap" by avoiding behaviors that destroy the average person's investment returns.
However, that doesn't mean financial modeling should be completely discounted. I still find value in financial modeling, and here's the primary reason: It provides a reasonable sense of whether a client is financially on target. Financial modeling will never be perfect, but it generally falls within a reasonable ballpark, and that ballpark is a tremendous aid in financial decision making.
A Foundational Starting Point
A lot of my time working with clients is spent chewing through individual financial issues with unique circumstances. For example:
"We'd really like to buy a house in X neighborhood, but we could also just stay put. Is it smart to move?"
"I have three years until expiration on my stock options, and I'd like to hold out for a better price, but don't know if I can risk having them reach expiration at a lower price?"
"I've always toyed with the idea of being a [golf coach, volunteer park ranger, etc.]. Well, maybe in retirement in 10 years."
"Our kids are doing great. Well, actually, John has had some setbacks with his corporation downsizing, and with his kids, we know things are tight. We'd like to help them out. How much could we gift without compromising our own future? And, gee, we really feel like we'd need to gift an equal amount to his siblings, too—to keep things fair."
"How much do I need to hold in stocks/bonds?"
With each of these decisions, and so many more, knowing if you're on target, have some catch-up to do, or are ahead of the game and by how much, can greatly impact your decision making. Financial modeling can give you a foundational baseline. Periodic updates to your model, particularly after rocky market periods or at major life events, make this a dynamic tool to help make financial decisions with confidence.
Financial Goals & Financial Modeling: Tracking Your Financial Progress
The list of common financial goals below can help you create your own list of financial goals. Coupled with financial modeling, you can start to track your progress as you work toward achieving your goals (click the images to enlarge).
Make Better Financial Decisions
A financial plan that includes long-term financial modeling will help you make better financial decisions, no two ways about it. If you work with an experienced Certified Financial Planner (CFP®), one who knows the rules of the game far better than a lay person and one who has seen the inner financial details and decision points of dozens, or maybe even hundreds of other people, you are hiring on an experienced pilot to help guide you along your first flight down this path.
So, let's sharpen the pencil, do the tough math, and show me the numbers!