If you want to take a vacation in a foreign country there is quite a lot of preparation. From visa’s to plane tickets, to health insurance, to voltage adapters, to cell phone plans, to weather estimates and clothing needs. A checklist of sorts.
Planning a vacation is easy compared to planning your life, but most people leave their life plan and the financial part of it to chance. Not smart. Planning is one of those areas where you seldom get more value out than the value you put in.
Let’s review why we plan and decide if any of it is not worth the trouble.
We want to understand the external environment of our decision space. Like looking at hotel brochures. What will it be like where we are going. What will I need to be comfortable. In the financial part of the world things like economics, tax policy, government regulation, job prospects, career choices and a life partner matter.
We will require a checklist of what we want or need to do in context of our environment. Once done, we will be looking for two aspects. What have we put on the list that conflicts with some other part and what have we failed to include at all.
Understanding what we want and understanding how the external world works gives us the opportunity to anticipate things. Some good, some not. Anticipating is important. Anything anticipated is partly solved. It is only surprises we have trouble with.
Once we have a conflict free and reasonably complete list, we can address the resources we have at hand. The list is much longer than a bank account and an investment portfolio. It includes assets we use every day, like a home or a computer or a car. Assets we use must be replaced or reconditioned from time to time. Part of the plan.
We must consider assets that will produce income. Some are obscure assets like the value of government benefits and employer pension plans. Most importantly, we must understand that our ability to work is our largest asset. How big is that? If you live in a world where you need an investment return after taxes higher than the inflation rate by 0.5%, your income increases only be inflation and you have 40 years to work, your career is worth about 1900 weeks pay. With 30 years to go about 1500.
You are quite valuable. Part of planning necessarily involves protecting that value against its loss. That is what disability income insurance and life insurance do. There are no winners with insurance, only alternate payers of the money your career is worth.
There is life beyond the end of your career and there are needs out there that will not be provided from working then. Planning connects up the various hidden income sources and your required lifestyle and establishes a missing amount. You will address that with an orderly program of investing while you are earning. Complicated arithmetic, but little more.
The plan will also address debt. You could think about it as a negative asset. Debt consumes part of your income.
Not all debt is bad. Debt is a financial tool that make your tasks easier or harder depending on how you use it. It is important to know about how after tax income and expense happens and how many debt payments can be imposed on the future without harming current or future lifestyle and security. An orderly plan to eliminate debt is worth developing.
With pieces in place people can relate what they are doing on a monthly basis to their goals. The why is motivating and it makes execution more likely. The plan should provide for review and revision. Nothing remains the same for long and the plan is conditional on what you want, what you have to get it with, and what the external world is like. Rethink it regularly.
Eventually people discover that financial planning is merely organized common sense and everyone learns what they need to know about it, but sometimes too late.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772