More Planning Equals More Confidence

Regardless of income, however, those who do some planning also save more and feel more confident about their financial futures.

The research, sponsored by the CFP and the Consumer Federation of America (CFA), found that almost nine in ten American households are engaged in some type of formal or informal financial planning, but the amount and depth of the planning can vary greatly.

Just one in five household decision-makers (19%) is a comprehensive planner who takes a methodical approach to financial planning, while one in ten (10%) does virtually no financial planning at all. The research further identifies nearly two-fifths of households (38%) as basic planners and one-third of households (33%) as limited planners.  

One of the most compelling findings is that the more extensively households plan, the better prepared they are financially in terms of the likelihood of saving, investing managing credit card debt; and  their finances. While higher income households are more likely than lower income households to plan, more than half (54%) of comprehensive planners have annual incomes below $100,000.

“Those families with the lowest incomes are the ones who would benefit the most from financial planning,” noted Stephen Brobeck, executive director of CFA. “Households with the fewest financial resources benefit the most from carefully planning spending, saving and debt management, [although] marshalling limited financial resources to meet essential needs represents a huge challenge for these households.”

Four Types of Planners

The analysis identified four distinct financial planning profiles that include all American households.

Comprehensive Planners (19%). Members of this group have a comprehensive financial plan that goes beyond a simple household budget to cover things like retirement savings and insurance. Two-thirds (67%) of comprehensive planners used a financial professional with fiduciary accountability, specifically a Certified Financial Planner professional or a registered investment adviser (RIA), to help prepare such a plan. These households have specific savings goals as well, with 88% having a specific plan for retirement and 80% having a plan for emergency savings.

Basic Planners (38%). The majority of basic planners (80%) have a plan for one or more specific savings goals, though only 35% have a comprehensive plan that organizes these plans, with another 31% saying they are likely to make a plan in the coming year. While two-thirds (66%) say they have a household budget, fewer than half (41%) say that budget is written down or stored in electronic format.

Limited Planners (33%). A large majority of limited planners (69%) either have a household budget or a plan to address at least one individual savings goal – typically retirement savings – but not both. And very few limited planners (11%) think they will make a comprehensive plan in the next year. But most (91%) either have no credit card debt or have a plan to pay off this debt.

Non-Planners (10%). This group does virtually no financial planning. Nine in ten (92%) say they have no plan for any specific savings goal, and virtually none (99%) think they will create a comprehensive financial plan in the next year. They also are the group with the most difficulty managing credit card debt. Four in ten have credit card debt, and fewer than half with this debt have a plan to pay it down.

Planning Leads to Saving

The more extensively households plan financially, the better prepared they are to meet goals ranging from dealing with financial emergencies to living well in retirement.

Financial planning is strongly associated with confidence in managing finances. Nearly all comprehensive planners (94%), about four-fifths of basic planners (81%), less than three-quarters of limited planners (70%), and only about half of non-planners (53%) have this confidence.

Financial planning is also highly correlated with saving for financial goals. A majority of comprehensive planners (91%), fewer than three-quarters of basic planners (73%), about two-fifths of limited planners (39%), and only one-fifth of non-planners (20%) save for emergencies. Most comprehensive planners (91%), only 70% of basic planners, two-fifths of limited planners (40%), and only about one-third of non-planners (32%) save for current or future retirement.

Predictably, the higher the household income and level of education, the more likely an individual is to engage in financial planning. Among comprehensive planners, close to half (46%) report annual household incomes of at least $100,000 and about half (49%) have a four-year college degree. By comparison, among non-planners, over half (53%) have incomes under $25,000 while more than two-thirds (69%) have a high school education or less.

But these correlations are far from perfect. The majority of comprehensive planners are middle class. In fact, a majority (54%) have incomes under $100,000, including a quarter (24%) who have incomes below $50,000. Furthermore, limited planners and non-planners have very similar demographic profiles in terms of income and education.

“This research reaffirms the value of financial planning for all households and also the value of receiving assistance from a financial professional who always puts the clients’ best interest first and abides by a fiduciary standard of care,” said Kevin R. Keller, chief executive of the CFP Board.

The CFP Board and the CFA conducted the research with assistance from Princeton Survey Research Associates International, which surveyed a representative sample of 1,002 financial decision makers nationwide between April 12 and 24.