Planning From 30,000 feet.

Context is everything. What would be a weak move at one time, could be a very strong one at another. Life will be easier if you recognize the context and adapt to it rather than playing some sort of free form game. There are people who need not behave that way, but they are the exceptions and basing decisions on exceptions is usually futile.

It takes time to be free form and if you cannot carry it off, it reduces your chances of achieving success

Elon Musk, Bill Gates, Jeff Bezos and many others are outliers. They have unique skills, an unlimited work ethic, and are fearless. Few have that package of talent. And they are lucky. When people play on the edge, some slip.

Almost all millionaires are hard-working, but every billionaire is lucky”  Nick Maggiulli

For we mortals

People tend to make better decisions when they understand where they are and where they are going.. There may be some variation but the possible trajectories are remarkably similar.

Recognizing the demands, the preferences, the limits, and the time is helpful when planning.

Noticing the context.

The overview. The timeline in this example will run from beginning a first job to a year of so after the second death of a couple. The variations in the timeline will be around how the people understand their vision for life. Some advantages and limits will be important.

A big element of how it unfolds is how they define their lifestyle. Some are flamboyant,others frugal. That changes how long it takes to pass through the parts of the life plan. The pieces will overlap to some extent. That is easy enough to accommodate. Some things will be particular to you. Maybe a dependent parent, or a disabled child. Maybe an addiction of some kind. Special cases are beyond the scope of this article.

The framework

Once you think about it you will find every case is a special case, but they all fit on the framework. The framework is the key to managing. It’s always there.

  • Phase One – First job, first money
  • Phase Two – Permanent relationship
  • Phase Three – Children
  • Phase Four – Career established
  • Phase Five – Children settled
  • Phase Six – Preretirement
  • Phase Seven – early retirement
  • Phase Eight – late retirement
  • Phase Nine – after first death
  • Phase Ten – second death and settle estate

If you set out the important purpose of each phase you will have a guide for that step. Each has limits as well. Once you see that, you run into a fundamental idea in economics. Resources are scarce so every decision is a trade off. It is easier to make good trade offs if you have a clear purpose and understand priorities.

For example A clearly important target in phases one through three or maybe four is get control of debt. Others are to develop your career, be a strong partner and parent, and learn investment skills so money is available for education and retirement.

The tradeoff is lifestyle for other things you deem important. It is not so hard if you can see the landscape more completely. You cannot spend as much as you make and still achieve what you need.

Checking your vision

One way to notice how you are seeing the big picture is to examine your decision around debt reduction. Many people like to be investors instead. It seems more positive. The thing to notice is the money you use is the same either way. It is not part of consumption. That’s what lifestyle is. You could make a case for your approach depending on how you see your investment ability and things like interest rates, the economy and taxation. The key though, is you did not spend the money. Paying down debt is an investment and one that reduces stress, provides control, and creates a resource to use later if necessary. Learning to invest, even with small sums serves you well later when the amounts are larger.

If you have your mortgage paid off before your children go to university, paying for education would be easier. On the other hand creating an Registered Education Savings Plan is attractive too. Many people cannot do both. Trade-offs and priorities.

The hangup for most people

Short-termism. What looks like the best decision today may in fact be the worst decision in a bigger context. When you have the whole picture laid out even in just general terms, you have a far better chance of ending up with a workable, possibly even optimized plan. In some ways, executing a lifelong strategic plan is like the Travelling Salesperson Problem. TSP. Given a number of cities to visit and return to the beginning, which route optimizes the journey? Could be distance, could be time. If you look at the article on Wikipedia, you will find it’s a very complex problem with no closed solutions available. Optimization is a very difficult problem. Strategic financial planning is not easier.

People tend to not do it because it does not result in a “perfect” answer. That is not a rational excuse. Just try to be directionally accurate.

Avoiding

Avoiding means

  1. Seeing a general picture. The further reaches of it will be necessarily fuzzy. The future is likely to be different. The general structure though will be unchanged. The resources needed to implement your preferences, will not be how you would do it if you were in that phase today. You’ll be forced to pay attention as things change.
  2. Developing a few guiding principles. There is only one financial choice that matters. Spend less than you earn. After you have some money left over you will have flexibility. A reserve fund, money set aside for future obligations, lower risk of interest rates rising, Optional behaviour is how you control the future. On a bigger scale than mere money, you will want to know how to assess the tradeoff of income versus family time, or where you live.
  3. Seeking specific tactics that address at least three of the next phases from where you are. One at a time is usually not the best. Most of the time you will be doing more than one thing at once. Like the save for education, save for retirement, pay off debt, acquire assets you use — house, car furniture. If you find your resources are too limited to do everything, you must reduce lifestyle, increase income, or take longer to pass through the phase.

Life and financial planning are about balance. You need to know what you are balancing and why you are doing it.

The big payback, is most decisions are easier to make. Ones that come your way fit or don’t. Knowing what does not fit “you.” is a time saver.

The takeaway

  1. Spend less than you make.
  2. Keep track
  3. Know the overall nature of things, before you make key decisions.
  4. Learn how to prioritize what you must do.
  5. Anticipate
  6. Watch for changes
  7. Make changes to your skill set to enhance your earning ability.
  8. Make yourself, your spouse, and your children participants on the same team and make sure that’s how they see it too. Team building skills will benefit everyone.

I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com

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