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Financial Freedom Is Merely Organized Common Sense
Financial Planning – Use A Guide or A Map
Financial planning is a troublesome and important endeavor. It’s important because a problem anticipated is a problem solved and it is troublesome because projecting the future relies on the past to provide the pieces that build the model. The future might be based upon different pieces. We don’t know what we don’t know and that makes accurate prediction impossible.
I think financial planning is like dark energy. It exists in theory but evidence of its uses or even its existence is, at best, indirect. What we should want is a model that produces insight. Precision is of little value unless you know how the future will unfold. If you do know, you are wasting your time preparing financial plans.
There are two types of financial plans. Road maps and guided. Road maps have the advantage of appearing certain. Guided are only predictive in short periods. They are quite uncertain for the long run. Their only long term elements are those of direction and shape.
I have no love for road map plans that extend beyond about 5 years and I would prefer two. The problem is that plans of this type tell you more about the planner than they tell you about your financial future. To build long plans people assume what is convenient for their purpose.
The future is unknown so rigid or perfect plans are automatically wrong. We delude ourselves if we think the future must behave as the past. Delusions are a blemish on your chances of success.
Future problems and opportunities change so we need someone who can notice and redirect resources.
Guided plans are evolutionary. They change to take advantage of circumstances as they arise. They too are based on assumptions about the future but the assumptions are not rigid. You are never finished with this type of plan. The plan is like a garden. It needs to be weeded, fertilized and watered at regular intervals. Sometimes you need to plow it down.
Stop stuff that does not work and let the winners run.
A guided plan involves a look at a long time frame with a model based on what we know from the past. Interest rates versus inflation, tax structure, spending structures, age change effects, first death effects, business or employment income, government plans and many more. That look will provide a general shape and direction. It will not be a guarantee of success or even of general outcomes.
Once built the guided plan can be tested across its variables but there is always the limit that not all the variables are present or known.
Every couple of years the guide reappears and resets the estimates based on what has been learned since the last revision.
For example, If someone sold their business in the late ’80’s and made the planning assumption of 12% on short term t-bills, it would have worked for a few years. Once it changed though, they had to make prompt adjustments to either their spending or their portfolio.
Things change. When they do, change your plan. Employ a guide with a wider world view. You know your spending and overall outlook. Let a guide fit that with external reality and do it often.
A financial plan that has no requirement for revision in the near term is not really a plan. It is a persuasive tool to get you to do what your planner wants.
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@moneyfyi.com | Twitter @DonShaughnessy | Follow by email at moneyFYI
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