7 Reasons Why Good Financial Planning Early On Is So Powerful

We often dismiss something we hear because the messenger is suspect.

Usually, it’s because they’d benefit from us taking the action they call us to take.

This is completely understandable in an environment where we’re constantly bombarded by ads trying to entice us into forking over our hard-earned cash for whatever they’re selling, whether it’s good for us or not, and whether it’s the best option available or not (which it rarely is).

This one’s different…

A Report from an Interested Party that We Should Still Heed

The Financial Planning Standards Board (FPSB) “manages, develops and operates certification, education and programs for financial planning organizations by promoting global professional standards.”

They recently published a report about the value of financial planning, describing its methodology as follows: “This quantitative study was undertaken in February 2023 and involved an online survey of 15,322 respondents from 15 territories, including Australia, Canada, Chinese Taipei, Hong Kong, India, Ireland, Malaysia, The Netherlands, New Zealand, People’s Republic of China, Republic of Korea, Singapore, South Africa, United Kingdom and United States. Each respondent was over 25 years of age earning over US$60,000 equivalent p.a. or holding over US$35,000 equivalent in investable assets. The sample included both advised and unadvised consumers.” 

The report later states that 8163 of the respondents, about 53%, did not have a financial advisor, while the remaining 47% did have one.

As you might expect, the report extolls the value of financial planning, especially planning provided by Certified Financial Planners (CFPs).

However, although the FPSB is understandably an interested party in our individual decisions about hiring a financial planner, that doesn’t mean they don’t have a point.

The Benefits of Financial Planning in General

The report cites the following as the top 10 areas where the 7167 respondents who have an advisor reported finding value.

1. Investment advice (40%)
2. Retirement planning (36%)
3. Wealth building/management (35%)
4. Pensions (27%)
5. Cash flow management (25%)
6. Retirement income management (24%)
7. Helping articulate financial goals and tracking progress (23%)
8. Tax planning (22%)
9. Maximizing pension benefits, e.g., Social Security (19%)
10. Reviewing insurance needs and arranging coverage (18%)

Another nine benefits garnered between 1% and 18% mentions.

As you may imagine, many of these benefits overlap, such that one person may (as most do) experience multiple benefits.

Early Financial Planning Is Especially Powerful

When you’re younger, you have yet to hit peak earning, and you have a long time to let investment returns compound. You also have longer to let high-interest payments wreak havoc on your finances.

This makes financial advice you get early in your life and career especially powerful, chiefly in these 7 areas…

1. Goal Setting

If an advisor helps you figure out your goals and priorities early in life, you have more time to pursue them. This can mean splurging on things that bring you real joy and cutting back on things you might spend on just because they’re the next shiny object or because your peers are spending on them.

Can you imagine decades of life knowing you’re spending on the right (for you) things while also saving and investing enough for your future self?

2. Career

Especially early in life, having an advisor can help you identify and weigh the pros and cons of various career paths you might pursue, helping you figure out the optimal path between your passion, your calling, and your long-term financial goals.

I can’t tell you how many people I know who either pursued a high-earning career that they had to leave because they couldn’t stand the work or who pursued a passion that didn’t provide enough income to cover their current-day needs, let alone set them up for eventual retirement. Neither path leads anywhere you’d want to go.

3. Taxes

The first time I hired an accountant to help me file my taxes, decades ago, he helped me identify a legal way to itemize thousands of dollars worth of deductions that I was sure I didn’t qualify for. Paying him less than $200 saved me over $2000 in taxes I didn’t owe but would have paid. This was back when my salary was much lower than my current income, so it made a huge impact.

This doesn’t mean that everyone should hire an accountant or a financial advisor to reduce their tax liability, but in many cases, it can save you far more than it costs.

Jing Zheng, founder of Neat Financial Planning shares another example, saying, “I once advised a single 28-year-old professional earning over $200,000 annually. Single with no kids, she dedicated most of her time to work and had a strong cash flow surplus due to minimal spending. Her primary interest at the time was developing a taxable investment portfolio.

“I introduced to her the concept of a backdoor Roth IRA. Initially, she expressed doubts about her eligibility for Roth contributions due to her high income. I explained how the backdoor Roth IRA method allows individuals with higher incomes to bypass the conventional income limits by making non-deductible contributions to a traditional IRA, immediately followed by a rollover into a Roth IRA.

“I showed her how, assuming a 7% annual return and a 25% marginal tax rate, maximizing her Roth IRA contributions annually until age 65 could result in a tax-free portfolio of $1.2 million, nearly 1.5× higher than a taxable portfolio under similar conditions. She was surprised to learn how powerful it would be to start the back-door Roth IRA strategy early in life. Since then, she’s been diligently maximizing her back-door Roth IRA contributions.”

4. Budgeting

Related to the above, if you have a trusted advisor help you create a workable budget, you’re more likely to stick with it, limiting out-of-control spending and devastating debt levels.

Yes, you can find online resources that will help you do this, but having someone you can reach by phone, online, and/or in person to discuss things increases the likelihood of a favorable outcome.

5. Debt

Sometimes, taking on debt is appropriate and helpful. Other times, it can put you into a financial tailspin, and it’s hard to survive. A trusted advisor can give you an unemotional second opinion that helps sort through your needs, wants, and momentary whims.

6. Investing

An investment advisor can help you figure out how much risk you can and should take. For some, this may mean not putting all their money into high-risk assets such as cryptocurrencies or meme stocks. For others, it might mean investing an appropriately high fraction of their portfolio in prudently risky assets such as stock funds (and despite my personal preference against them, for many, index funds are the optimal choice). For yet others, it may simply be getting them started investing for their future self’s needs.

Doug Greenberg, President, Pacific Northwest Advisory shares, “I worked with a young professional in her early 20s who was new to the concept of investing for retirement. She initially thought it was too early to start thinking about retirement. However, I illustrated how small, consistent contributions to, e.g., a Roth IRA could compound over time. We set up an automatic plan that allocated a portion of her monthly income to this account. Years later, she reached out to thank me. Thanks to that early start, she was on track for a comfortable retirement and had developed a strong habit of saving and investing.”

As long as the investment advisor is a fiduciary, i.e., legally required to place your interests ahead of their own, they’re likely to help you find appropriate investments that (hopefully) outperform or at least match the market return after fees, and they’re likely to help you stop before panic selling when, not if, the market crashes.

Regarding that last, Michael R. Acosta, CFP®, ChFC®, CSLP®, Financial Planner at Genesis Wealth Planning, LLC says, “One of the best pieces of advice younger professionals can implement is automated saving and decision-based spending. Your saving target should be 15-20% of gross income. By saving at a higher rate, you reduce pressure on your required rates of return, a variable you can’t control without taking undue risk. This reduces your volatility, creating more stability from a behavioral perspective.”

7. Housing

A trusted advisor can help you figure out when (if ever) it’s time to buy a home rather than continuing to rent, and once you decide to buy, how much house makes sense given your financial and non-financial situation (e.g., how many kids you have).

I recall thinking in 2000 that I couldn’t possibly afford to buy a house. I didn’t have a financial advisor, but I was lucky enough to have a friend who asked me if I ever ran the numbers to be sure I couldn’t afford it. I did as he suggested. The numbers proved I could indeed afford to buy, and that it even made more financial sense than continuing to rent.

I bought the house, and then, when I remarried five years later, I sold it for double what I spent on it and bought a larger home with my wife.

Not everyone will be lucky enough to have such a wise friend say just the right thing at just the right moment.

The Bottom Line

Financial advice isn’t affordable for everyone. It also isn’t necessarily crucial for everyone.

That last is why finding such a resource early in life is especially powerful.

It cuts shorter the time you may make unforced mistakes and offers far more time for the right choices to compound and make the positive difference that much more significant to your end results.

However, if you fall into the large group of people who need it and for whom the value far exceeds the cost, finding a trusted advisor (or at least a trustworthy resource that offers enough knowledge that fits your personal situation well enough) can make a huge difference over time.

And no, I don’t sell financial advice.

I write all this because, while I believe reading free resources like what I write can help many people, I can’t know nor specifically address your personal situation, so my writing may or may not be the right fit for you. However, hiring the right financial advisor will provide personalized advice that will help the right client far more than the money it costs.

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This article originally appeared on Wealthtender. To make Wealthtender free for our readers, we earn money from advertisers, including financial professionals and firms that pay to be featured. This creates a natural conflict of interest when we favor their promotion over others. Wealthtender is not a client of these financial services providers.

Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.