A View of Financial Plannning

Financial planning does not work the way most people think.  At least not in the beginning.  Financial planning is not about making you wealthy or even secure. It is about getting the most of what you want by using the least of the resources you have today. Wealth and security may result.

Ideally lifestyle now and in the future will be unaffected by the planning.

Step one is just arithmetic.  Find the lifestyle today that allows you to save enough and pay off enough debt so that there will be enough money to live in the way you are accustomed to doing, forever.

That means two things are important.

  1. You need to know what you want and when you want it, and
  2. You need to know what you can use to get it

Many if not most people come to a financial adviser without a clear idea of these two concepts.  Eventually they find that life would have been easier or worked out better had they known.

Financial planning is about compromise.  You cannot save and invest the money you spend.  A year gone by is gone forever.  You cannot have high yield and risk free at the same time, unless you are bringing special skills to the table.

Financial planning is about understanding straightforward concepts.

  • Compound interest is the power source for everything financial.  It works for you when you invest over a long time, and it works against you when you borrow.
  • You cannot spend a given dollar more than once.  If you borrow, you can spend it now, but it you have committed some future dollar to repaying it.  Plus interest of course.
  • Think of life financial things as a balance beam.  Resources on one end and commitments on the other.  There is a fulcrum between them and just like in physics, the effect of something depends where you put the item on the beam.  On the resource side, things you own now will be far left of the fulcrum and will have a big effect on how it tips.  Things you will have later are closer to the fulcrum and don’t affect balance much now.
  • Yield is what the economy allows you to earn.  There are no magic bullets.  Time matters and a fair yield matters.  Try not to impose conditions on your investments that are in fact, not necessary.  More conditions reduces yield.
  • Many of the things that affect your plan are outside your control.  (taxes, inflation, regulation, banking risk, government policy, the length of your life, special needs in the family)

Do your advisers and especially do yourself a big favour.  Understand the process.  Understand resources and time.  Understand insurance, understand debt and understand a little about how investments work.  Do all that and you will tend to be successful and you will tend to have less fear because you will see how it fits together.

Last.  Start soon.  Time matters as much as money and more than yield.

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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