The One-Page Financial Plan

I’ve read a number of books on personal finance, but The One-Page Financial Plan by Carl Richards is without a doubt among the easiest to understand and a great starting point for those new to the subject. Richards is a certified financial planner and Director of Investor Education for the BAM Alliance. He’s also the author of the Behavior Gap website and known for his simple black and white sketches that capture more complex financial concepts*. The technical content of this book is nothing new to those who are familiar with budgeting and investment portfolio construction. What separates Richards’ work from others is the connection he draws between our values and our finances. He does this in a relatively simple and straightforward manner which was something I have not seen before but really connected with.

The concept of the one-page financial plan is somewhat misleading. With financial plans there are often a number of documents that need to be reviewed making it impossible to include everything on a single piece of paper. The concept of a one-page plan is really intended to get at the three or four major things that are really important to us and that we value above all else. It contains the following items:

  • The answer to the question “Why is money important to me?”
  • Your best guess at your financial goals
  • Any debts that you’ll need to pay down

Richards starts by asking readers one question: “Why is money important to you?” While this sounds simple, it isn’t easy. As we begin to answer this question we have to continue asking “Why” to arrive at the core reason and ultimately define what we value.

It’s about being really honest about where you want to go, getting really clear about where you are now, and then making your best guesses about how to narrow the gap between the two. [1a]

Richards emphasizes that our futures involve a great deal of uncertainty. We don’t know where we’re going to be thirty or forty years from now. Our financial plans need to include a certain amount of flexibility to help us navigate the unexpected events that life will throw at us. He advocates a continuous process of guessing at where we want to go without committing to our guesses.

current-reality-goal

While goals are important we also need to identify where we are. We can’t develop a plan get to where we want to go if we don’t know where or what we’re starting with. Constructing a personal balance sheet provides us with an understanding of our current financial location. This can be difficult to do as it forces us to confront mistakes we’ve made in the past and tried to hide. While we need to take responsibility for our mistakes we shouldn’t beat ourselves up over them. We’re all human, and making mistakes is our reality, but we can and should learn from them. From an execution stand point developing a balance sheet isn’t difficult. We simply need to list out what we own (assets) and what we owe (liabilities). It’s that simple.

The remainder of the book focuses on the key aspects of financial planning to help us reach our goals. Remember that the financial planning process is simply about bridging where we are right now to where we want to be in the future. Along the way, Richards highlights how our behavior impacts the decisions we make about money and the consequences that result. One of the major behaviors that he highlights are the stories we tell ourselves to justify a decision or purchase. I’ve certainly been in this position on a number of occasions, and it’s important to realize that spending money in itself isn’t bad. Problems occur when we spend money on things that we don’t truly value or that don’t help us accomplish our goals. This will likely lead to disappointment and a poor financial outcome.

Few of us actually go through the process of budgeting and tracking our spending. It’s a boring process that can seem restrictive at times. A constant reminder of how much we’re not allowed to spend. Richards suggests an alternative perspective. Budgeting should not simply be about numbers, but should focus on developing an awareness about how we’re spending money. That way we end up spending on the things that really matter and have sufficient funds to achieve our goals.

Budgeting forces us to face the reality of how we spend. It allows us the opportunity to see the gap between what we say is important to us and how we spend our money. [1b]

  1. Save as much as you reasonably can.
  2. Spend less than you earn.
  3. Don’t lose money. Avoid speculative investments in an attempt to make up for lost time.

The other major behavior that Richards discusses is our tendency to act impulsively. This occurs not only when we spend money, but also in how we react to fluctuations in the stock market. I’ve certainly had the feeling of fear when I see the stock market going down. The thought of my retirement account declining in value isn’t easy to stomach.

fear-greed

However, the impulsive decision to sell when the market goes down is among the worst long-term decisions anyone can make as it locks in a permanent loss. It’s a short-term emotional reaction to a long-term investment process. Richards refers to this buy-high-sell-low behavior as the “Big Mistake.”

In fact, real investing has as little to do with CNBC programs as it does with Lifetime movies of the week [1c]

The solution that Richards recommends to achieve our long-term financial goals through real investing is an asset allocation approach to portfolio construction. There is no one-size-fits-all portfolio, but Richards suggests the following as a simple default

  • 42% US Stock Market (Vanguard Total Market Fund)
  • 18% International Stocks (Vanguard Total International Fund)
  • 40% Bonds (Vanguard Total Bond Fund)

Over time these allocations will change as the individual funds grow in value. Periodic rebalancing–selling what has done well and buying what has done poorly–brings the portfolio back to the desired allocation and reinforces a systematic sell-high-buy-low strategy–what smart investors should be doing.

The problem with a lot of personal finance books is not the quality of advice, but the implementation and execution on the part of the reader. In some cases readers may be best off looking for a financial advisor that will work with them to achieve their goals. Richards provides some suggestions to help when looking for a real advisor. For those that choose the do-it-yourself path he offers one final important piece of advice: “Behave. For a really long time.”

References
1. Richards, Carl. The One-Page Financial Plan. Penguin Group. New York, NY. 2015.
(a) p. 18
(b) p. 101
(c) p. 161

Notes
*Last year Carl made 12 of his more popular sketches available to subscribers of his newsletter. I included two of them above.

NOTES – The One-Page Financial Plan.pdf


What I’m Reading
Why We Can’t Stop Torturing Ourselves With 401(k) Wreckage (Bloomberg)
What I’ve learned in 10 years (James Osborne)
The Advantages of Simple Allocation Strategies (Wesley Gray)
Why Investors Need to Stop Distrusting Wall Street (Gus Sauter)