moneyFYI
Financial Freedom Is Merely Organized Common Sense
Co-ordinating The World And Our World
People have trouble with planning because there are so many elements to consider. It never gets easy, but by recognizing different ways to connect parts not usually thought about together, we can gather some ideas to help us succeed.
Incentives, constraints, and tradeoffs
In his book Applied Economics, Thomas Sowell talks about the nature of economics. It is governed by three characteristics – incentives, constraints, and tradeoffs. The idea, oversimplified, is some things will be easier to get, incentivized, while others that are more constrained. For example, the future income reward for going to school and becoming a person with specialized knowledge exists, and some follow that to their benefit. All the while though, there are constraints. It takes far longer to become a neurosurgeon than to become a software engineer or teacher. The future reward may be greater, but the time and lost income in the interim may be too much to ignore due to current circumstances. Thus the need for tradeoffs.
Making sound decisions about tradeoffs makes a real difference in how life plays out.
Good tradeoffs happen more often when people realize they are making tradeoffs and understand what exactly they are trading away and in expectation of what they might receive instead.
Time, tax, inflation, and change
Economic success involves converting ability, training, and experience into money. Recognizing that we cannot work forever means some money must be moved to the future for future spending. Time is a factor we can analyze. Retiring at 50 will yield very different duties in the present than will retirement at 70.
Our income is subject to tax, and beyond limited retirement plans, the savings come from money we have after taxes are paid. For high earners, there could be as little as 45 cents per dollar of earnings available to make the decision.
Inflation adds another price. If a litre of gas costs $1.50 now, how much should I set aside to buy a litre 30 years from now? At 5% inflation, I’ll need $4.30. It is not easy to get 5% after taxes to take my $1.50 in hand and turn it into a litre of fuel 30 years from now. 5% after tax is a huge return over a long time. Almost all consumables are subject to inflation, and few tie the after-tax income required to support future spending to those costs. At a minimum, you should have an idea about what costs you incur now that will go away and what others will arise.
Hopes, fears, and expectations
This triad is the emotional side of what we do when we plan.
We want to accommodate our hopes, clarify our expectations, and find ways to manage or eliminate fears. It is the human part of us.
Again, it helps if we can identify and specify the nature of each.
The technique is to address each, estimate a course of action, and ask ourselves, “What happens then?” Each iteration of the question will tend to make a more workable approach. We have all seen the problem of “Unintended consequences.” Secondary and later effects should be addressed as part of the decision. Have you ever, and I mean even once, seen a political program created that tells you anything other than how the immediate benefit will be worth the immediate cost.
The immediate cost says little about the cost over time.
Work hard at saying, “Okay then what,” and acting on what you can estimate will happen. Be especially careful with decisions that impose future obligations. Some of those may become out of tune with future circumstances.
Life vision, strategic variables, potential tactics, and logistics, including the review and revision function.
Vision will collect your hopes, fears, and expectations. It will provide a time framework that will arrange the order of events and help create priorities.
Strategy is about choices, resources, and constraints that are particular to you. A strategy helps you understand the potential benefits of allocating resources in other ways. For example, spending an extra year in college to get a master’s degree.
Tactics are established, packaged methods to achieve a particular outcome. Life insurance, for example, provides a package that consolidates the history and experience of humanity to date in dealing with the risk of premature death. Methods and variables are well known, and the packages are efficient.
A problem many develop is picking tactical tools that have not been fitted to the life vision and priorities arising from the choices in the strategic assessment of their situation.
Logistics is the doing of the plan and its tactics. Many plans are never implemented. Even simple plans like filling a prescription go astray in the doing. Why bother planning unless you intend to implement and learn as you go.?
Even if you implement, the plan must grow with you. Review and revise as necessary. Your first plan might work for a few months, even years, but it will not work forever.
The point
If you understand who you are, what you want, what risks there can be, and act on optimizing what you find, life will go easier.
I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve 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 startup, 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 and business matters. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Federal Business Development Bank.
Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.
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