Edges And Thresholds

Most people understand the idea of a border. It’s a relatively bigger deal to travel from the United States to Mexico than it is to travel from New Mexico to Arizona. There are some formalities with changing states but usually you don’t even notice.

Financial planning and other things in life have border conditions — edges. Managing the transition from strategy to tactics is one such. It requires more careful effort than does deciding within one side or the other. Learning how and deciding to invest in context of a life plan, that’s strategic to tactical, is a much different effort than deciding to switch 5% of your portfolio from stocks to bonds.

Many of the problems in personal financial planning involve stepping carelessly across the strategic – tactical border.

Managing an edge condition

The direction matters. Crossing from Mexico to the United States is not the same as going the other direction. In financial planning, the direction of going from methods (tactics) to strategy gets very different results than does going from strategy to tactics. You should notice that most things people bring to you are tactics.

Why is it harder?

Most tactics are packages. Some are highly precise tools, distilled history of how people have solved the problem before. Others are constructed to present a particular idea. You might remember packaged mortgages from fifteen years ago. Many packages are compelling and invite a purchase that addresses in your particular case, “no known problem.”

How likely is it that such a product will address your particular wants and needs? Maybe, but your priorities? Not likely.

Always understand why you cross an edge in a certain direction. You should move from strategy, your reasoning for what you want and when, to tactics to fulfill the goals. The tactics will make sense then.

Thresholds

Thresholds are like borders in some ways but usually don’t cross the strategy-tactics edge.

How much money should you accumulate before you change the package or tool you use for investing. Most people begin by using an investment fund of some kind, often with monthly deposits. The dominant idea is to make saving easier. Secondarily, it provides some insight into how investments work.

Eventually the capital is big enough that investments matter more than saving. You should be aware of how that threshold will affect you earlier than it is necessary to change your emphasis. When you cross it, different skills will matter more.

A way to assess when to switch your approach

Suppose you save $300 a month into an index fund or something similar. After a year you will have as much as $4,000 and at 7% it is earning about $300 a year. Savings dominate the growth.

If you had $60,000 then the expected earnings would be more than the savings.

At $100,000 more than double the savings. At some point the investment aspect will dominate and you should decide whether you want to use a saving-dominant plan as your tool. It might work if you have no skill or knowledge. You could acquire those in a different way, but that can be risky.

There is no right answer for everyone, but everyone faces the problem. A problem or opportunity anticipated is half resolved.

Other thresholds involve debt, lifestyle, remaining time to work, and more.

The takeaway

Many things require you to re-orient your thinking. Don’t use the same systems to address both.

Anticipate when changes will benefit you.

Acguire tools and technique that clearly attach to your wants, your resources, and your priorities.

There is serious risk in mishandling edges and thresholds.

We don’t “know” what will work. Decisions matter. Many of them tend to be one and done. Most sound financial planning is process driven. Understand where a sound process will help you.


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I build strategy and fact-based estate and income plans. The plans identify alternate ways and alternate timing to achieve both spending and estate distribution goals. In the past I have been a planner with a large insurance, employee benefits, and investment agency, 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. I have appeared on more than 100 television shows on financial planning, have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, Banks – from CIBC to the Business Development Bank.

Be in touch at 705-927-4770 or by email to don@moneyfyi.com

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