moneyFYI
Financial Freedom Is Merely Organized Common Sense
Is There A Bengal Tiger On Your Front Lawn?
Probably not. But should there be one, action is required, immediately. That is unlike the need for immediate action on your financial plan. There appears to be no danger to leave it. It is not at all like the tiger out there.
Most people fail to do serious financial planning because it is “boring” or “difficult” or “not urgent” or “complicated” or (insert your excuse here).
People may possess a nearly randomly selected collection of parts that they call a financial plan, but in reality, they have given up efficiency within those parts and have overlooked other important parts that were presented poorly. No good is likely to come from that. They will waste some money and lose some time. The time matters.
The simple answer is that most people don’t do financial planning because they don’t know what it is for. When you don’t know what it is for, it is impossible to evaluate the future benefits against the immediate costs of time and money.
Successful financial planners and their clients build the “What’s It For?” part before they engage in techniques.
Planning starts with strategy. It must not start with the methods. A registered retirement plan is not a strategy, it is a method to develop money to be spent in the future. Have money to spend in the future is the strategy and there are many ways to achieve that.
Selecting one technique as opposed to another is a decision at the tactics level. That is what your adviser should help with. Strategy is common sense, tactics are detailed, changing, structured and nuanced. You probably cannot keep up to tactics, nor do you want to be bothered. Strategy, however, should be exclusively yours.
If an adviser starts with tactics, they will fail because the client will revert to emotional and poorly informed methods to decide. Something important may be missed. If it fails to work exactly as described, it will be the adviser’s fault, whereas, if the tactic was devised as a choice after the strategy was decided, then the blame for a weak performance can be shared. We were a team.
Security and safety are common needs, but they are hard to sell to without a strategic overview. People don’t like them much. They are postponable. Usually for a long time. Usually until the problem is seen to be too formidable to solve in the time remaining. Another reason to do nothing. It wouldn’t work anyway.
People do like options and so the “what’s it for” question should be in the context of what this choice will allow you to do, not in terms of what it is, does or prevents.
All tactics are difficult to assess. Most people instinctively compare future benefits to current costs using a process called Hyperbolic Discounting. Unfortunately, hyperbolic discounting tends to create value for future outcomes remarkably close to zero. The reality for the people then is that saving might pay me tomorrow and spending pays me today. I like today better.
Is there a defense to this intuitive calculating blemish?
Possibly. Hyperbolic discounting effects are minimized when people create a process to address a distant problem. For some reason, only the next step in the process is discounted. Psychologically there appears to be a big difference between saving $750 each month, and accumulating $1,000,000 for delivery 35 years from now.
Habit effects soon apply. Once the initial choice is made each future payment gets easier. Better still, habits tend to domino. Once you start to change one, others become easier to change. Once savings is begun, others like risk management are easier to address. Sometimes in the other order, but the effects are the same.
People will not do comprehensive, (or simple either for that matter) financial planning until the goal is perceived to be worth more than the immediate cost. That usually means that the goal is presented as the outcome of a process that is straightforward, clear, doable and flexible to changes in conditions.
You cannot start with the method. You must start with the problem/opportunity and attach a process to that.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com
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