Investor’s column: Why New Year’s resolutions, like financial plans, often don’t work

This article is being published on my birthday – a milestone one at that.

I find that milestone birthdays – and the start of a new year – can be times of great reflection: We look back on what we’ve accomplished (or regret what we didn’t) and resolve to do better or differently in the coming year(s) … especially before that next milestone birthday comes around.

In my world, I meet a lot of people who say they need to get their financial planning started, but somehow, it never seems to happen. Or, they have had a full financial plan done, but never make time to implement it.

That said, there are times when even fully prepared and mostly implemented financial plans don’t work. Why? Some common themes that cause a financial plan – or a well-intended New Year’s resolution – not to work:

Unclear values or priorities

A financial plan that addresses the wrong goals and needs shouldn’t be implemented.

Individuals or couples need to take time to define what they want – and in what priority – so that a clearly defined financial plan will work for them and they will be committed to following it.

Asking such introspective questions as, “Are we allocating our resources (time and money) in line with our priorities?” will help to uncover important values to be addressed.

Unrealistic expectations

A sound financial plan is only as good as its inputs. It was a stellar year for the stock market in 2017 – far above average. But using rates of return such as 2017’s in a retirement forecast is a recipe for disaster. It’s not sustainable.

So, too, is a retirement expense budget that’s far less than what an individual or couple really spends. If an individual or couple doesn’t synch their true spending with the budget used in their forecast, they could run out of money in retirement.

Emotional decision making

Irrational exuberance when markets are trending up – or panic when markets are trending down – often cause individuals to abandon their investment plan (often the backbone of a good financial plan).

Furthermore, confusing needs with wants (such as vacation homes, toys, lifestyle maintenance) can wreak havoc on a financial plan when circumstances unexpectedly change – especially when the cost of those wants are underestimated.

Inflexibility

If a financial plan is designed to only work with one set of assumptions, it could be doomed for failure.

Events happen that are often out of an individual’s control, and there need to be contingencies built into the plan accordingly, such as working longer, cutting spending or lowering goal expectations.

And all good financial plans need to have an appropriate emergency fund built into them to address unforeseen circumstances.

Inaction

Mentioned earlier, but it bears repeating: Even a perfect financial plan is worthless without proper follow through – just like every New Year’s resolution.

Failure to take action can lead to a host of other problems (lack of insurance when a large loss happens, loved ones without proper resources or care, paying too much in taxes, etc.).

The way to prevent “implementation risk” is to hire a coach (financial planner) who will keep you on track and start small: Implement one piece of your financial plan at a time.

Eventually, it will all come together.

If you’re nearing a milestone in life and don’t have a well-developed and implemented financial plan, perhaps it’s time to make a resolution to get one in 2018?

Be mindful of the silent killers of financial plan success noted above, and have a great year.

This story was originally published January 8, 2018 at 4:38 PM with the headline "Investor’s column: Why New Year’s resolutions, like financial plans, often don’t work."