The concept of planning reminds me of an old riddle. Three frogs are sitting on a log when two decide to jump off. How many are left on the log? The answer is three. Two of the frogs only decided to jump off – this doesn’t mean they actually did so.
The type of planning I am referring to specifically is financial planning. Whether it is retirement, a new car, a new home, education, a vacation or any other life goal, money is a factor – and many times a large one. Without financial planning one can only hope to cope with those events and reach one’s goals – one is like the frog deciding to jump without making any actual movement to do so.
In today’s world, the need for financial planning grows daily, and the ever-increasing instability of our personal lives makes planning more important than ever before. The book The Two Income Trap reported that 87 percent of bankruptcies filed by families with children were due to one of three reasons: job loss, medical bills or divorce. Who has not been personally affected by at least one of those events? Life’s traumas can happen to anyone. The key is to protect ourselves financially so we can weather any storm.
One survey by the American Savings Education Council found that more than half the people surveyed expect to spend less than 70 percent of their pre-retirement income during retirement. That statistic might explain why people born between the years 1946 and 1955 have a median net worth of only $146,000, including the equity in their homes. With rising healthcare costs and rapidly changing economic markets, the assumption of living on only 70 percent of our working wage is very unrealistic, even if one led the most Spartan lifestyle.
Adding to the financial danger in failing to save is the fact that our personal debt is steadily increasing. According to the latest figures from the Federal Reserve, consumer debt in the United States hit a record $1.98 trillion in late 2003, not including mortgages. When mortgages were included in that figure, household debt represented 111 percent of disposable income in 2003, up more than 32 percent from 10 years earlier. Personal bankruptcy filings are also at record levels; they totaled more than 1.6 million in fiscal year 2003. That’s 15 bankruptcies per 1,000 households – nearly double the frequency of just 10 years earlier.
But how does one formulate that financial plan? The current 24-hour, round-the-clock media exposes people to an overwhelming amount of financial advice – from newspapers, magazines and the Internet; from family, friends, or acquaintances; from people in the financial services industry. Although we are inundated with what seems like an infinite amount of information, but data is not knowledge. In fact, the false knowledge delivered by the noise of today can create more problems than it solves. Even the most financially astute among us become confused at times.
The current complexity of the financial world makes it more important than ever to suppress the noise and follow unbiased professional advice. The combination of our personal financial instability, the complexity of financial markets, the future demographics that drive the economy, and our own lack of discipline results in a real need for solid planning. In contrast, however, the statistics show that many people are very poorly prepared for the future – and sometimes even for the present. Money is a tool to help you live the life you desire. You can use that tool to your advantage if you decide to plan – and act on those plans. When we face our fears and determine our goals, we can move forward and live our lives.