Investing and Tax Planning Come Last

When I meet somebody new and they hear what I do for a living, if they ask any questions those questions are almost always about tax or investing.

I’d estimate that 90% or more of the discussion on the Bogleheads forum is about investing and tax planning. Ditto for most personal finance discussions I see elsewhere online.

When it comes to financial planning, people really want to talk about investing and tax planning. And I understand why. Thinking that you’ll be able to increase your investment returns or save on taxes feels good.

But investing and tax planning are, respectively, the second-lowest and lowest priority in the realm of financial planning. In an ideal scenario, digging heavily into those topics should come last, after everything else is in order.

Insurance, estate planning, and cash flow planning come first. (I would encourage anybody to read the Basic Financial Planning Checklist I created a few years ago.)

When working with a new financial planning client, it’s common that they’ll show up with a slice-and-dice asset allocation that presumably a great deal of thought went into — but they have no idea how much they’re spending per year.

Or they can deliver a whole thesis off the top of their head about modern portfolio theory, the efficient market hypothesis, and multi-factor models — but they are woefully underinsured with respect to life or disability coverage.

Or they’ve spent an enormous amount of time researching Roth conversion planning — but they don’t have a will or other basic estate planning documents in place.

Every once in a while, somebody shows up with a portfolio of just target date funds — but they know how much they spend each year, they have all of the necessary types of insurance coverage, they have their estate plan already in place and recently updated. That’s the person who gets the gold star. From the financial planner’s perspective, it’s a huge sigh of relief when you see that person.

Hiring a financial planner to ask whether you should have a small-cap/value tilt to your portfolio is like setting an appointment with your primary care physician, so that you can ask her whether she thinks you should switch your standard Saturday morning breakfast from scrambled eggs with spinach to an omelette with tomato and mushrooms. There are a hundred other health questions that should come first. And if you truly have all of those other questions answered and squared away already, then the answer to this question is, “Either is just fine. You’re all set. Go happily live your life.”