Six reasons your financial plan will fail
The best laid schemes of mice and men
Go often askew,
And leave us nothing but grief and pain,
For promised joy!
To A Mouse, on Turning Her Up in Her Nest, with the Plough – Robert Burns
As a big advocate of having a written and regularly reviewed financial plan, I also recognise that things can go wrong. Financial plans can fail for a variety of reasons.
The fact they sometimes fail is not a good reason to excuse yourself from putting in place your own financial plan. Knowing some of the reasons why financial plans fail should enable you to avoid these traps and construct a plan that is more likely to stand the test of time.
Here are six reasons financial plans fail along with the steps you can take to improve your chances of success.
1 – Unrealistic targets
Objectives in life and business should always be SMART – specific, measurable, achievable, realistic and time bound. Your financial planning targets are no different.
Setting unrealistic financial planning targets at outset will mean you stand less of a chance of reaching your goals. In fact, unrealistic targets are likely to leave you feeling completely disheartened, particularly if you find yourself getting further away from your goals rather than closer towards them.
Unless you have already started on the path towards a particular financial goal, it can sometimes be difficult to know how realistic it might be. A way to avoid falling into this trap is to experiment with making progress towards a specific financial goal before embarking on the full journey with your written financial plan.
You should also ’sense check’ any financial goals you might have. Have you managed to achieve something similar in the past? Do you know anyone in a similar position who has managed to reach the same goal?
2 – Incomplete information
The output from a financial plan is only ever as good as the quality of the input. The phrase Garbage In, Garbage Out is used in computer science to describe the fact that computers will process without question the most nonsensical of input data and produce nonsensical output. Feed garbage into your financial plan and expect to get garbage out the other side.
Before constructing your financial plan, make sure you have all of the information you might need readily to hand. This definitely includes details of your assets, liabilities, income and expenditure. Having all of this data available in a neatly organised fashion makes the process of constructing a financial plan that much easier.
3 – Lack of commitment to your goals
Embarking on a financial plan towards goals without strong commitment is unlikely to result in a happy ending. Motivation is what drives us to succeed in different areas of life. Financial planning is no different.
If you lack strong commitment towards a particular financial planning goal, step back and ask yourself why you are working towards that goal at all. Do alternative goals exist which you have stronger feelings about?
Lack of strong commitment can also be the cause of financial planning failure when a couple do not both share the same desire to reach a particular goal.
When financial planning as a couple it is important to agree on a consensus before constructing your financial plan. If you both want the same things, or at least understand that you want different things and you are prepared to share resources to reach those goals, then your chances of success will be greater.
4 – Overambitious assumptions
Accurate financial planning relies on reasonable assumptions. These can be the most variable aspects of a financial plan and are certainly something to keep under regular review.
Within your financial plan you might make assumptions at price inflation, investment growth, interest rates, life expectancy and earnings inflation. Getting them all absolutely correct at outset is not a realistic target. However, they can still be wrong with a certain margin without adversely hampering your ability to reach financial goals.
Looking at history is a good place to start when making your assumptions. The common regulatory risk warning about past performance not being a guide to future performance is important, but over the longer term things tend to behave in roughly the same manner. The longer the track record of your assumption, the more likely it is to be accurate.
5 – Unexpected external factors
As Robert Burns wrote in 1785, even the best laid plans can go askew. You can plan for as many eventualities as you can think of and chances are it will be the unexpected event that will throw your financial plan off course.
Losing your job, the economy entering recession, change of legislation or falling ill are all factors that can all play havoc with your financial plan. You might be able to plan for some of them or even insure against the financial impact of others, but at some point in your life there is a reasonably good chance that ‘life’ will happen.
The best remedy against this failure factor is to build a degree of flexibility into your financial plan and understand that it might not always be possible to stick rigidly to your original plans. You should certainly include the creation and maintenance of an emergency fund within your financial plan. It is this pot of cash that will get you through the financial impact of unexpected external factors when they arise, which they undoubtedly will.
6 – Missing milestones
Financial plans tend to focus on the achievement of very long-term goals. These include things such as retirement or mortgage repayment. Maintaining the necessary motivation to reach sometimes intangible goals in 20 or 30 years time is enough to challenge even the strongest resolve.
By setting shorter term milestones, it becomes easier to maintain your motivation and also measure progress. When you start with your financial plan, it makes sense to include a milestone you can hit after only a couple of months. Over time you might extend the length of these milestones to a year or longer.
Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice. You can follow him on Twitter @martinbamford. He planned to go to bed an hour ago, had an idea for this post and failed in his original goal.
