Why Does Financial Planning Affect Your Net Worth?

You don’t have to be this guy to reach your goals!

“If you don’t know where you are going, you’ll end up someplace else.”
–Yogi Berra

Hey! Psst!

Could you use an extra $185,750*?

*It’s an average. No guarantees. YMMV.

We all could, right?

Want to know how?

Read on.

Yup. People who used financial planners (not “investment advisers” who view you as a walking piggy bank), had a median net worth of $185,750 more than those who didn’t.

That number means that 50% of the people who used financial planners had a net worth even more than $185,750 higher than their non-planning counterparts.

That doesn’t mean going to a bunch of sites, reading articles, and doing nothing.

It means actually going through the planning process, making a plan, and then executing that plan.

Why does investing a couple of thousand dollars in your future yield such an enormous payoff?

That’s the question that Syracuse’s Dr. Robert Stawski and others set to answer. They evaluated people who had an average income of $61k and a little under four years of college in central Oklahoma to determine what factors were most significant in increasing their retirement savings and contributions.

In other words, they looked at average Americans.

They discovered three main factors:

  1. Setting goals led to financial planning, which led to more savings for retirement
  2. The older you get, the more you care about goal setting
  3. The more income you make, the more money you save

#3 is intuitively obvious. Unless you’re Paris Hilton spending every weekend on benders in St. Tropez, there is a direct link between income and savings. This is the “I can’t spend it all” school of thought for the high income crowd. High income accounted for 40% of the reason that people save for retirement.

But, for those of us who aren’t making seven digits a year or higher, we’re going to have to make a tradeoff between present desires and future needs. If Monkey Brain, what I call your limbic system, gets his way, then you’re going to go all in for present pleasure. Your future self can deal with the consequences, and when the time comes, you’re going to be eking out a living on Social Security.

According to the previously cited research, the critical step in saving more was goal setting. If you don’t have clear and attainable goals in your life, then you don’t answer the question “why” when it comes to saving for retirement.

Setting goals accounted for 38% of the reason that people save for retirement.

However, just having goals doesn’t mean much. You have to do something about it.

That’s where financial planning set in.

People who actually created a financial plan then had the mechanisms in place to help them hit their goals. Getting a financial plan informed these people what they needed to do in order to increase their chances of success in meeting their goals.

That’s where the remaining 22% comes from.

Having a high income and setting goals gets you to the red zone. Making a plan gets you across the goal line.

Which net worth are you aiming for?

Published by

Jason Hull was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business. He held a CFP certification from 2015 - 2021. You can read more about him in the About Page. If you live in Johnson County, Texas or the surrounding areas, he and his wife are cash buyers of Johnson County, Texas houses.

2 thoughts on “Why Does Financial Planning Affect Your Net Worth?

  1. I’m a big fan of the process (obviously….), but my favorite part is different than most. I love the fact that you’re establishing shorter-term milestones toward your goal. It was always fun to have client meetings and discuss whether we’d hit the small milestone. That avoided moronic conversations about the market (which we can’t control), about stock-jockeying (worthless pursuit), and instead focused on the real issue: why are we behind/ahead and what should we do to adjust. Those small adjustments headed off a bunch of bigger problems that could have happened later down the road.

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