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Financial Freedom Is Merely Organized Common Sense
Thinking About Strategic Financial Literacy – Three Rs
No financial plan is ever finished. You change, the environment of your life changes, and tools and technique change. You must keep up or gradually lose efficiency and even effectiveness.
As Field Marshall von Maltke pointed out nearly 200 years ago,
“No plan survives first contact with the main body of the opposing force.”
In our case, the opposing force is the real world.
Keeping up involves three parts. Know what is happening. Compare to what you thought would happen. Using the new information change your plan or your tactics. The three Rs.
Record. Good decisions rely on good information. You should know your expenditures in a general way at a minimum. Most lifestyle things should be summarized with the key being how much variance could occur before you have to act. Other information is handy too. You can keep downloads about things that interest you, statements from your financial providers, and your expectation. Expectations matter because information is useless in isolation.
Review. The process of comparing what has happened with what you expected to have happen. Finding the meaning. Review is a context thing and context is king when it comes to making decisions about what you should do next. For some parts of your affairs annual is not enough. Examining lifestyle spending quarterly will probably help you stay inside you plan. Ignore anything close to expectation and apply different rules to anything you cannot change in the short run. You can decide you have been eating at restaurants too much and change effective immediately, but you cannot change your municipal taxes if they go up 10% over budget. You must find that elsewhere.
Revise. What do you revise? There are three approaches:
- Revise the goal. People are pretty ambitious when creating goals for saving and debt reduction. Reality often gets in the way. There is nothing wrong with being ambitious, but the decision eventually must co-exist with lifestyle. It might take a few tries to get the mix right. The only restraint is what remains of saving and debt reduction must match the long term goals. What you spend cannot be used in the future.
Find cost savings in what appears to be a certainty. Allocating capital to reduce taxes, even slightly, has big advantages. Making interest deductible from investment income is an easy tactic. - Revise lifestyle spending. Most people go there as a last resort. It need not be so terrible as they think. Shopping for the higher priced goods pays well on a dollars saved per hour basis. Having thought lifestyles spending through, people can anticipate their needs and when sale items appear they can pick up inventory at a good price. Avoid buying things only when you need them. Shopping for cars can be attractive. New or used. Top of the line or one model down. Lease or buy. Repairs versus depreciation decision. Vacations and recreation follow the same model.
This matters even though it is hard to see the value of small savings. Suppose your lifestyle costs 40% of income after taxes, other deductions, mortgage payments, savings and insurance. Suppose you reduce that total by 5%. In 35 years it will amount to nearly three years of today’s total income if you can invest for 3% over inflation. - Revise the method used. Sometime people are too risk averse. People fear things they do not understand. Learn about investing and much of the aversion goes away. Some insurance can be managed for cost advantage. I had a client once who changed the deductible on his casualty insurance to be the least he would actually claim. The annual saving was more than $10,000. Life insurance can be layered to accommodate changing needs with different formats for different sub-purposes.
Most people don’t like the 3Rs, but over the long run, they matter. They clarify and refine your purpose. They provide insight into the future that can give you advantages. They help align resources and priorities. They gradually educate you with both facts and experience.
They improve your ability to achieve your goals. What is that worth to you?
Tomorrow, we will revisit risk.
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. don@moneyfyi.com 866-285-7772
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Thank you for your timely posts on Financial Literacy this is a very important subject in South Africa today.I have submitted your posts for consideration to the Sowetan Dialogues a local newspaper that is in the forefront to bring this crucial aspect of information to the general masses.The forthcoming one is on 28th March which involves the following institutions Financial Services Board,Human Sciences Research Council,National Treasury,National Credit Regulator and the Financial Planning Institute.You have been in the forefront in educating us on the subject and we thank you for that at least we will have a reasonable contribution to make.We appreciate your commitment and your generosity in this regard you will be updated