We have more than 40 years of combined experience in providing financial planning to the Perth area, but even we were surprised when we found a little-known research paper authored by Kym Irving from the Queensland Institute of Technology in 2012. The article was subsequently published by Australasian Accounting Business and Finance Journal in their special issue on Financial Planning.
According to Ms Irving, the traditional six-step process of financial planning not only impacts clients mechanically through results, but psychologically, too. One of the central themes of the article is that the physical reality of improved well-being also results in a better psychological sense of well-being.
The Six-Step Process
The very nature of financial planning is that it helps individuals create a series of positive, goal-oriented outcomes by helping them manage their funds and ensuring that they meet their financial goals. Ms Irving used a six-step model of financial planning that included:*
- Definition of the level or scope of engagement.*
- Identification of the client’s goals.*
- Accurate assessment of the client’s individual financial situation.*
- Formulating the client’s financial plan.*
- Executing the financial plan by acting on it.*
- Evolving and revising the financial plan on a regular schedule and when life circumstances change.*
This six-step plan is systematic and goal-oriented. It gives clients an action plan to produce desired outcomes through appropriate allocation of funds. It produces specific strategies to ensure the desired outcomes and contains a system of checks and balances to monitor progress towards those goals.*
Ms Irving also noted that the field of financial planning has changed due to the many reforms that have taken place. Financial planning now includes taxation, superannuation, retirement planning, debt advice, estate planning, wealth creation and wealth protection strategies such as risk insurance and life insurance.*
The success rate of financial planning means that the clients are likely to attain positive outcomes which increase their life satisfaction and physical well-being. When the client produces more wealth, it tends to increase their access to satisfactory outcomes concerning their goals and their lifestyle.*
Planning the Financial Future
According to Ms Irving, financial planning involves activating a wide range of mechanisms that can have a positive effect on well-being. When one is planning for the future, it forces them to be more engaged with the tasks they perform on a daily basis. Engagement is now seen as a reliable indicator of increased well-being.*
In addition, the process of planning firm goals can provide a greater sense that one is in control, which is another indicator of well-being. Not only does planning provide a sense of control, it provides evidence that the client is both capable and competent at managing their life. Ms Irving refers to this as “environmental mastery.”*
When a person attains environmental mastery, they can control their everyday affairs and their environments to fulfil their personal needs and desires. They are able to process and control a complicated matrix of external events and take full advantage of opportunities for improvement of their lives. A feeling of environmental mastery has been linked to psychological benefits such as reduced depression, reduced anxiety, enhanced well being, enhanced life satisfaction and improved mental health.*
According to Ms Irving, the effective setting and attainment of goals can add structure and purpose to life. Goals are the expression of one’s vision for the future and Ms Irving’s research indicates that they are important to helping our lives have meaning and viewing our lives as worthwhile.*
However, it is argued by many that some goals can be dysfunctional, especially if they involve accumulating “toys” or money in an effort to prove one’s worth. Functional goals, such as a secure future for one’s self and one’s spouse, tend to provide more increase in life satisfaction.*
Probably the most salient finding of Ms Irving’s research into the psychological benefits of having goals: they don’t even have to be attained to produce psychological benefits.
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*Kym Irving, 2012. Australasian Accounting Business and Finance Journal, Volume 6, Issue 4. “The Financial Life Well-Lived: Psychological Benefits of Financial Planning.”