Sunday, November 04, 2007

Why Financial Planning is Important

In 1995, I was working at Pure Software when the company went public. One of the very early engineers said to me that day, "I've achieved the American Dream. Millionaire before 30." At that time, his net worth was easily into the mid single digit millions.

Fast forward a little more than a decade later, and I'm trying to recruit the same person to my company. We eat lunch, and we chat. I ask if he even needs to work anymore, given what I knew of his finances, and he said, "Actually, no, I do need to work." The house he lived in was paid off, but his finances weren't in as good condition as I had assumed.

Before you think, "What an idiot. This can't happen to me." Consider this:
  • In 1995, financial information was hard to find. The list of good financial books worth reading for non-experts was down to Burton Malkiel's A Random Walk Down Wall Street, which while it is as good then as it is today, was a bit of a read. (My mom still doesn't understand the book)
  • Vanguard did not have a web presence then. The web brokerages were dominated by folks like eTrade, which did terrible things in executing your trades that you wouldn't want.
  • Financial advise on the web was limited to The Motley Fool, which back then touted Rule Breakers, Rule Makers, and a bunch of high risk strategies.
  • John P. Greaney's fabulous Retire Early Home Page, which I recommend to anyone, did not exist until 1999.
  • In person financial advisers were just as ignorant and sleazy as they are today. It is common, in my experience, for even sophisticated, intelligent people to fall prey to them.
I would like to think that I would have done better, the truth is, financial information is so much better and available today, and with a decade of experience, my financial life is better organized than it ever has been, despite still needing improvement. Nevertheless, I find it difficult to fault someone who might have fallen into the easy trap of "I'm wealthy. I can get better advice that less wealthy people get." The truth is, while being wealthy can open up opportunities that the less wealthy won't get (chiefest of which is access to Vanguard's Admiral Shares), it won't get you better advice, by and large, which means that you still cannot outsource your financial life.

I'll close with a reflection on John Greaney's page on retirement planing:

The time I spent ... learning about financial markets were undoubtably the most highly compensated hours of my career.

Not only does the learning help you avoid pitfalls that others fall into, the learning leverages all the money you'll make in your career, giving you a double whammy as your career grows. If you're Jack Welch, John Chambers, or similar CEO/entrepreneur material, you might not need such an education, but for the rest of us, learning this stuff isn't nearly as hard as programming in C++, and is easily as lucrative.
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