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Financial planning: Do it yourself or get help?


Financial planners can help with many decisions, but you can handle certain others on your own.



Financial planning: Do it yourself or get help?

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Choose article section... Identifying and calculating your financial goals Tracking your spending to find more savings Choosing investments to reach your targets Getting a handle on life insurance needs Monitoring your plan to stay on course Trying to find a middle ground WEB POLL

Financial planners can help with many decisions, but you can handle certain others on your own.

By Leslie Kane
Senior Editor

Some doctors swear by financial planners; others prefer to do without.

"I've used a couple of financial planners, and I haven't found them helpful," says Tom Richards, a family physician in Ventura, CA. "I find it very rewarding to take care of my own finances. No one cares as much as I do about my financial well-being, and there's enough information available so that I've learned how to manage my own money."

But other physicians aren't interested in learning, don't feel knowledgeable about money matters, and know they need professional expertise. "Budgeting and investing are difficult," admits Marc Silberman, a family practitioner in Springfield, NJ, who recently completed his residency training.

Another doctor deeply regrets that he missed out on a financial planner's unbiased advice. "My wife of 28 years kept my books and paid the taxes for me," says Timothy Holcomb, a family practitioner in Mt. Juliet, TN. "It turned out that for the last two years, she'd been having an affair, and was putting away money to run off. Due to what she stole, I have to start all over, when I should be thinking about retirement. A financial planner would have saved me."

Whether a financial planner would save you, too, hinges on how simple or complex your financial picture is, and whether you have the time and inclination to do things yourself.

Complicated financial situations cry out for an adviser. Such scenarios might include: second marriages in which you both have assets, a hodgepodge of investments you've latched onto haphazardly over the years, large debts and no obvious way to pay them, and an inability to assess how your portfolio is performing or whether it's too risky.

On the other hand, "making financial decisions can be pretty easy for doctors who are employed," says Dee Lee, president of Harvard Financial Educators in Harvard, MA, and co-author of The Complete Idiot's Guide to Retiring Early (Alpha Books, 2001). Most employers offer tax-deferred retirement plans, which typically offer a choice of around 10 mutual funds, so it's simple to make selections. "Even doctors who are self-employed may want to manage their own finances if they're willing to do the research to learn about investing, retirement planning, estate planning, and insurance," she adds.

But you need to be honest about your eagerness to research financial matters and take necessary action. And even financially savvy folks might want to use a planner as a cross-check of the work done by an accountant or attorney. A piecemeal approach to a financial plan isn't optimal; you're better off using a planner, who takes all aspects of your money situation into account.

If you want a financial plan that's more detailed than "save money and hope for the best," here's what you can do yourself, and what a financial planner will bring to the party.

Identifying and calculating your financial goals

By yourself: While you can simply save a set percentage of your salary, you're better off having a target to shoot for. Vague, broad goals create no commitment. You need to define goals that are specific in terms of how much you'll need and when you'll need it.

Start by listing your major financial goals, such as retirement, buying a larger house, paying for college, and supporting elderly parents. Then figure the number of years until you want to achieve those goals. Make sure to include an emergency fund that covers three to six months' lost income.

One way to compute these critical figures is with personal-finance software, such as Microsoft Money 2002 ($34.95) and Quicken 2002 Basic ($29.99). If you forego software, you can use a Web calculator instead. At , for example, you'll find a savings goal calculator and a retirement planning calculator. Both project your rate of investment return and also account for inflation (most experts suggest using a 3 percent inflation figure). At Fidelity's Retirement Investing Center (, key questions walk you through an investing strategy, and tools are available to help you create a financial plan.

Once you have your dollar targets, use the savings calculators to find out what you'll need to put aside annually to build sufficient funds. Make sure to account for money you've already saved.

With a planner: A planner will help you identify or prioritize your savings goals. He'll review your tax returns and cash flow statements to help create more precise figures. He'll also point out possible conflicts. For instance, you may need to delay starting an educational fund until you've established an emergency stash.

A planner will also help you evaluate the best investments for different goals. For example, the most appropriate investments for retirement wouldn't necessarily be best for funding a college education or for buying a boat in three years.

And a planner understands how your tax situation may affect your investment choices. Finally, a planner will walk you through "what if" scenarios, to show you how you'd fare, assuming different timings for different goals, and varying investment returns for goals that have different time horizons.

Tracking your spending to find more savings

By yourself: If you don't spot ready cash to put toward savings, develop a spending record to see where your money is going. Use a financial software program, or make a budget worksheet, creating columns for nondiscretionary fixed expenses (mortgage, real estate taxes, insurance premiums, loan payments, support for children and other dependents); nondiscretionary variable expenses (such as basic clothing, car, certain child care costs, food, household utilities, home repairs, medical care); and discretionary expenses (additional clothing, beauty care, credit card interest and fees, entertainment, household help, private school tuition, recreation, vacations).

Record your expenses for at least six months. Be precise; don't just list, "$800 a month to MasterCard." Itemize your purchases so you know who's making them, and what category they fall into. Pay particular attention to monthly interest on credit card debt; people are often shocked to find how much they're spending.

The rule of thumb is that total monthly payments on all debts—including mortgage, credit card, alimony, and child support—should be no more than one-third of your gross monthly income. If your debt percentage is higher, work on cutting it back.

Seeing the hard numbers in black and white can help you target areas to make changes.

With a planner: If you get a "deer in the headlights" look from a glance at your expenses, your budget may need more drastic work. Or what if you and your spouse clash on where to cut? If one of you is thrifty and the other lives to spend, compromise may elude you. "Couples might need a third party to mediate and help them come up with a budget they can both live with," says Lee.

And, adds Charles Ross, a financial adviser with Principal Financial Group in Atlanta, "some people need an outsider to prod them to change. If I see way too much money going to a large house, an expensive car, or clothing, I may suggest that they sell the house or car and buy a cheaper one, or take a hard look at whether they need all those clothes."

A planner may see that it's impossible for you to achieve all your goals when you want to. He or she will work with you to pick a more realistic time frame or savings plan, and may even question the necessity of some goals.

Choosing investments to reach your targets

By yourself: Learn as much as you can about investing from books, newspapers, and magazine articles. Web sites can be especially helpful. Check out such sites as Charles Schwab & Co. ( ) and MSN Money (

Then, follow a model portfolio, which gives you guidelines for dividing your investments into various classes, such as small-cap stocks, large-cap stocks, international equities, and bonds. You can follow the model portfolio at H&R Block's Web site ( Look under "Tools & Resources: Investor Education: Planning Your Portfolio: Asset Allocation and Diversification." Or see "Build a plan," in our Nov. 5, 2001 issue.

If you're a beginning investor or are pressed for time, stick with mutual funds rather than individual issues for the stock portion of your portfolio. To create a well-diversified stock portfolio on your own, you'd need at least 15 to 20 companies, which must be tracked regularly.

When you research mutual funds, make sure you check out each fund's risk, expense ratio, and sales charge. You can find this information in the fund's prospectus; at mutual fund supermarkets such as Charles Schwab; or through Morningstar, a mutual fund analysis company (try looking for Morningstar Mutual Funds in print at your local library, or check

Make sure to rebalance your portfolio at least once a year. This helps reduce volatility by keeping your original allocation intact. Say your allocation calls for keeping 20 percent of your portfolio in small-cap stock funds. If small-caps took off the previous year, then their increased value could have swollen that portion of your portfolio to 30 percent. You'd need to sell some of those small-cap stock funds, reinvesting the proceeds into other classes, in order to restore your allocation.

With a planner: If the prospect of choosing mutual funds and setting up a portfolio leaves you cold, have a pro do it for you. A financial planner can keep you from reacting impulsively: selling low in a panic when the market dips; buying a fund at its peak; or buying a fund based on its recent returns, and overlooking its high risk. He'll pick appropriate investments for you by determining your risk profile.

"There's more to knowing your risk tolerance than saying, 'I'm aggressive' or 'I'm conservative,'" says Ross. "People think they can handle risk—until the market falls. Others are so conservative, they'd never be able to retire unless someone prodded them to take some risk.

"Middle-aged people, in particular, often make emotional decisions about investments because they're playing catch-up," says Ross. "Or they hang onto a bad investment because of ego. It's helpful to have someone more experienced giving direction."

Getting a handle on life insurance needs

By yourself: First, calculate how much coverage your family would need to replace your income. Figure out how much they'd need annually, and for how many years. If you're employed, you may discover that you have sufficient life insurance through your practice's group policy. But if you need to beef up your coverage, compare premiums by getting quotes for term insurance through insurance Web sites. (See "Life insurance: What kind? How much?" in our July 12 issue.)

With a planner: Since certain types of policies are more appropriate for different circumstances, a planner can evaluate which policies best suit your needs. For instance, you might be lured by the investment element of a whole life policy, but it could be more efficient for you to use only term insurance. Or it could turn out that a combination of whole life and term would best cover expenses that will be incurred at different times. A planner could also evaluate whether the cash value in an existing whole life policy could be put to better use achieving your other financial goals.

And an adviser can help with estate planning, setting up a life insurance trust that would allow your heirs to avoid a hefty estate tax bill.

But be cautious when hiring a financial planner to advise you on insurance. Says Robert Patterson, a family physician in Sanford, NC, "I have contacted planners, but I was disappointed to find out that they were glorified insurance salesmen. All I could find are the ones who want to sell me 'things,' not services." Ask the planner how he's compensated, and consider hiring a fee-only planner, rather than one who earns commissions.

Monitoring your plan to stay on course

By yourself: You should check your financial plan, savings, and investment returns at least annually to see if you're on track. If you've had a major life change, such as a divorce, a new child, a decline in income, or a new job with different retirement and pension benefits, make sure your plan takes the change into account.

With a planner: If you're not confident that you'll keep on top of important changes, then give the responsibility to someone else. An adviser will review your portfolio and other investments, and discuss it with you at least once a year. "An internist client had taken on new debt during the year, and informed me of it when we met to review his finances," says Gary Schatsky, a financial adviser with IFC Personal Money Manager in New York City. "I suggested restructuring his overall debt. We saved $1,000 a year, between refinancing his mortgage and restructuring his home equity line of credit."

Trying to find a middle ground

If you're not wild about hiring an adviser, but wonder whether your financial picture is close to target, there is a middle ground. Go to a fee-only planner who will review your situation and develop a plan, but he'll leave it up to you to execute the plan.

A flat fee for plan development could run from about $1,000 to $5,000, depending on the adviser, his location, and how complex your situation is. If a planner reviews your account and meets with you during the year, he may charge an hourly fee ranging from $150 to $400.

It can be worth the price, however. "There are innumerable financial moves you might overlook if you do things yourself, whether they have to do with tax planning, setting up the right type of retirement plan, or revisiting any debt that you have," says Schatsky. "And you can't make the right investment decisions without an understanding of your overall financial situation. That's what a comprehensive financial planner brings to the party."



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Leslie Kane. Financial planning: Do it yourself or get help?. Medical Economics 2002;15:96.

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