“An investment in knowledge pays the best interest.” – Benjamin Franklin
In the 1986 hit comedy film Back to School, Rodney Dangerfield plays a self-made plus-size clothing magnate Thornton Melon. In the film, despite all of his success, he comes to regret not taking the words of his father, “If a man has no education, he’s got nothing”, more seriously.
With his home life in disarray, he ventures off to see his adult son at college having troubles of his own. It is here that despite having dropped out of school at a young age, Thornton enrolls in college with his son to honor his late father’s desire to see their family build on their legacy through education. While Thornton never becomes a star pupil, his commitment and tenacity inspire his son to finish school.
Education is important and empowers the individual to make better-informed decisions that can have lasting consequences. Ultimately, education helps arm us with the proper tools to get the job done. Even the most seasoned business owner (such as a plus-size clothing magnate), entrepreneur, or professional, will need more knowledge, and could do with additional education.
When it comes to financially successful individuals, for all of their ability to earn income, management of this wealth may require additional assistance.
When it comes to one’s own personal finances, it is important to be educated on and understand that there are three main financial schools of thought:
What is financial literacy? There are many definitions out there on what financial literacy is, who it is for, and what it can accomplish for those who possess it. At its core, financial literacy is a skill that encompasses a wide spectrum of topics relating to personal finance, money management/budgeting, and common financial themes and terms (at least at a conceptual level).
Financial literacy does not require that the individual be an “expert” on the subject matter, but rather they can comfortably navigate conversations around their finances. Financial illiteracy means that someone lacks skills to make better decisions around their finances. As a result, someone who lacks certain knowledge about products and services could potentially become a victim of poor spending and money management habits. These habits could lead to debt, worsening credit ratings, and even predatory lending.
How does one obtain financial literacy? There are many products, services, and tools out there that are marketed for improving financial literacy. For the do-it-yourselfer, there are numerous free videos and articles that are available online, as well as some fairly popular books on the subject such as Rich Dad Poor Dad, The Millionaire Next Door, and The Total Money Makeover.
For certain demographics such as employees in a 401(k) plan, or seniors approaching retirement, there may even be sponsored events and seminars where presenters may discuss very specific topics such as when to take Social Security or why they may want to purchase an annuity. While these sessions can be educational, it is important to note that they are often a thinly veiled sales presentation and should be attended with an attentive if not skeptical approach.
What is financial wellness? As with financial literacy, a simple search may land you over a dozen or so definitions, however, at My Financial Coach, we feel that financial wellness is best defined as a person’s relationship with their finances and money.
To expand on this definition, we believe financial wellness also involves some “light” financial planning, as financial wellness is also a bit of financial awareness. Put another way, financial wellness is about the personal feelings towards finance and also a cursory snapshot of a person’s financial situation.
The major difference in financial wellness versus financial planning is that financial wellness focuses more on behaviors and the psychology of money management as opposed to presenting a direct solution. The end goal is that financial literacy and wellness could work together and build up to the more analytical and optimization based financial planning approach. As a discipline, financial wellness seems more easily defined. However, as a product and service, there can be a wide variety of what constitutes financial wellness in comparison to financial planning.
Today, more and more employers are offering “financial wellness” programs to their employees. Just as health solutions, paid time off, and other benefits have allowed employers to retain talent, financial wellness is beginning to be looked at as a must have benefit. As a result, some companies may offer their version of financial wellness.
On the lower end, it could be a service that surveys employees about how they feel about their finances, their work benefits, debts, retirement, etc. The employee may even be supplied with some rudimentary steps forward as well as summary statements that might highlight their total benefits or “rewards”. These programs may provide some great education, but ultimately do not go as far as they could to motivate or encourage employees to make changes and progress towards their goals.
Fortunately, more employers are now looking to more comprehensive solutions to offer financial wellness, and so we have seen the rise of new firms such as Financial Finesse, Brightside, and SmartDollar. A common theme among many of these firms is that they often provide an online portal to take a temperature gauge of a person’s feelings towards their finances, as well as tools to monitor progress on aspects of their financial wellbeing, and often live representatives who can help provide additional guidance as needed.
Financial wellness as an employee benefit is a growing field, and so it is important to fully understand the costs associated with such programs, as well as how bare or comprehensive each service may be.
What is financial planning? Of all of the terms that we are looking to define today, financial planning is both at once easy to conceptualize and yet describable in hundreds of different ways depending on who you ask.
Financial planning is really a culmination of educating a client (financial literacy), assessing the psychology and health of a person’s relationship with money and their current situation (financial wellness), and then bringing it all together to present optimization and modeling (such as how to achieve retirement/get out debt/save for education) customized to the individual. While financial planning may have variations of this definition, what is more commonly described is the financial plan.
A financial plan is usually defined as a comprehensive prepared document that outlines an individual or couple’s financial goals presenting both the current snapshot as well as recommendations and projections for future success. A financial planner must take a client through a detailed process to ensure that they are providing the best advice tailored to their client. As a result, the financial plan itself may be very well the least complex feature of the planning process.
What that process looks like however can vary widely depending on who you work with, and what credentials the advisor holds. The CFP Board, for example, has defined the financial planning process in six steps:
Though not all financial advisors are CERTIFIED FINANCIAL PLANNERS™, those that are, are expected to adhere to those planning steps and even many who are not, follow a fairly similar path.
While there are a number of different designations, titles, and methods used by advisors, the most important aspect of choosing an advisor should be in their trustworthiness, competence, and willingness to listen to their clients. In recent years the biggest “buzzword” has been about making sure your advisor is a fiduciary, and there is a good reason for this as a fiduciary’s primary function is to always act in good faith on behalf of their client.
In this modern world, the number of financial ideologies, products, and services continues to grow. It is increasingly easy to get lost in all the jargon. In the end, the most important step a consumer can take on their own financial journey is seeking education.
At My Financial Coach, we make it a goal to provide a blend of all three of these approaches as necessary. We believe it is important to help educate, assess, and identify an individual’s relationship with money and then provide unbiased and comprehensive financial planning solutions.
To further learn about these concepts, we have created a guide to help you. Click the image below to see our Financial Literacy, Wellness and Planning Guide:
We hope that this window into the three financial schools of thought: financial literacy, financial wellness, and financial planning has been informative.
Andrew J. Crosby, CFP®, ChFC®, RICP®
Lead Financial Coach