Like speed, hype kills. The hype is always about a technique. Understand the simple part first.
The Reality of Financial Planning Is Simple
- There are three time periods that matter. Now, the past and the future. Planning requires that you deal with each.
- Consumption defines lifestyle. Food, clothing, transportation, housing, recreation, vacation, and a hundred more. All consumption occurs in the present.
- Income is earned in the present. Salary, interest, rent, dividends or whatever. Capital appreciation and such may appear in the present but it is not yet money. Different rules apply.
- Debt payments reflect the fact that you bought something using someone else’s money. The payment you make results from your promise to use your future income to make the lender whole.
- Saving transfers money you earn in the present to a point in the future where you will consume it.
Everything else is technique
From debt instruments like mortgages or student loans, to car leases, credit cards and lines of credit. They are just a way to spend money before you earn it. They become a budget item that covers many months in the future. They reduce your spendable income in the future when it hurts and make spending now feel okay, because it does not.
Saving is the process of transferring money from now to the future. There could be many possible uses for it, but one that never goes away is retirement. In terms of retirement, some day your money must work as hard as you do now. Think of retirement planning as just a system of deferred groceries. How much will you need then and for how long?
The transfer to the future is done by investing. Investing is mind boggling. Taxes, style, diversity, inflation, products, securities, indexes and the lot. They mostly get in the way of making good decisions. Saving is the key. If you don’t save, none of the investment material matters.
Investments and debt are both time machines that move money from when it is earned to when it is spent.
Balance In Time
- You earn money in the present.
- Each dollar you earn is first shrunk by taxation and other deductions like union dues and government plans of one kind and another. We call that the money you earn for “them.” It is slightly manageable and you or someone else should address it.
- What remains is manageable. It must work over three time periods. Now, then the past, and then the future. You must decide the allocation and you can do so fairly easily. Break your total annual income into four components. The money for them, the money for the past, the money for the future and the money for now. You will notice that consumption, the now spending is a small fraction of the total. That is the part you must replace for all time.
- Don’t incur debt unless you are willing to live with the payments out of your current consumption money.
- Money for now, ahead of money for the future is problematic. Saving what is left over is weak. Spending what is left over after calculated saving is strong. Not as much fun though. We are a difficult species to deal with. Saving pays off in the future and spending pays off now. Our emotional reward system does not value the future very highly.
Now Then Them
If you develop a strong sense of this balance, financial planning is nearly done. This is a strategic view. Once it is clear, the tactical view evidenced in available technique will become easier to assess and usually ignore. Hype is not persuasive when you know what you are doing.
It is about what your money means for you. If you learn to balance consumption over time, you will be debt smart and save the right amount too.
Best of all, you will know why you are doing it and that motivates.
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