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Financial Freedom Is Merely Organized Common Sense
LEGO and Financial Planning
It is Christmas time and grandparents are looking for the right gift for the little ones. A superior purchase is LEGO because it does not play with itself. The children don’t ignore the toy and play with the box. LEGO requires thought and persistence and it permits creativity and adaptation to the child’s unique view of the world. A nearly perfect combination of attributes.
But which set to buy?
In 2008, there were 4,720 sets in the corporate archive. There are unquestionably many more now.
Decide based on the way the child is able to interface with the pieces. The 405 piece ultimate building set seems a good place to start. There are enough pieces to be interesting and there is a box to store them in. Enough to be creative, few enough to be structured, and maybe best of all, orderly.
Your first financial plan should be like that too. Big enough to build on and small enough to understand and implement.
There is a tendency among amateurs to create financial plans that are like the LEGO Death Star. Thousands of pieces, immensely complex, expensive and beyond frustrating for a beginner.
A first financial plan is like the starter set. It will accomplish first steps and provide experience. First financial plans should deal with one thing well and provide an indicator pointing at the next step.
The starter financial plan deals with “Control Time”
Time is money. If you have a lot of time, you can earn a lot of money. What if you are counting on the time and don’t get it? You will leave unpleasant problems. Life insurance and disability insurance both allow you to get the money if you don’t get the time.
Continuing time is different than a point in time. When time stops, people need instructions. Wills and powers of attorney.
Every unit of time is somewhat different than every other one. Some things pop into existence unexpectedly. Other things happen sometimes but not others. The rent comes due every month, but you only pay for the car insurance once a year. You need a way to manage the fluctuations. Flexibility is a crucial factor in success. Have an emergency fund for the unexpected. Could be a line of credit in the beginning. Have accumulation funds for the predictable things that are not part of this month. Car, vacation, house down payment, furniture and the like.
Once you get the fluctuating time content idea, a short term plan becomes important. Sometimes people call it a budget, but budgets are rigid and accusatory. Plans are more human. Have one. The first one won’t be right and that is okay. Use mistakes to learn to do better ones in future.
Lastly in the “control time” zone, have a long term vision. Where am I going generally? How fast should I move? Driving to Orlando is different than taking an airplane. Both get you there but you must decide which is appropriate for your needs, temperament and time frame.
Financial plans are like that too. Financial plans should not exist for themselves, they should exist because they help you get what you want with what you have to get it with and in the way you want to get it.
The indicator says the next step will be “control debt.” You must pay attention to this because compound interest is never neutral. It is working for you or working against you. Debt is against you. There are two ways to control debt. Reactively, take a bigger share of your income to reduce debt that exists, or proactively incur less debt. Lower price means lower payments.
Financial planning is organized common sense. It is like a dot-to-dot picture. The dots are the things you need to know, the education, while the lines are the skill and experience that create meaning. The dots are easy to learn, the lines are harder.
In the beginning, keep the piece count and dot count down to what you can actually use.
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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