Potential clients often come to me in one of two predicaments. Some people feel stuck in their current financial situation, unable to see how they could possibly change things. Others have a lot of ideas, but they can’t tell good from bad and they don’t know what to focus on first.
Whichever end of the spectrum they fall on, they’re usually looking for two things: direction and certainty. They want to know what to do (direction) and they want to feel confident that doing those things will provide a specific result (certainty).
All of which makes sense. I am a financial planner after all, and planning generally involves mapping out a series of steps designed to accomplish a desired goal.
But the truth is that real financial planning, good financial planning, is never that straightforward. I can’t give you a plan that will last forever. I can’t tell you that if you take these specific steps, everything will work out exactly the way you want.
The world is too uncertain. You’ll be presented with new opportunities and obstacles along the way. Your goals and circumstances will evolve over time. Returns won’t materialize like you had hoped, or in some cases they’ll be much better than you could have imagined.
Navigating those changes requires more than a financial plan. It requires a financial philosophy with an underlying set of values and principles that allow you to adapt when the unexpected happens.
Here’s how to start creating yours.
What Do You Want?
Nobody really wants to max out their 401(k). Nobody wants insurance, or an emergency fund, or a debt repayment plan.
Those are all just tactics that can be used to achieve larger goals. And while they can certainly be helpful, they aren’t meaningful on their own or adaptable to new circumstances.
A financial philosophy is bigger than those tactics. The main question you have to ask yourself when creating your philosophy is this: what do you want?
Do you want security? If so, what would it take to feel secure? Is it a stable job? Is it a certain amount of money in the bank? Is it being debt-free?
Do you want freedom? If so, what kind? Is it the freedom not to work? The freedom to do work you love? The freedom to travel, or play with your kids, or go out to eat when you feel like it?
What are the things in your life that stress you out? What do you wish you could do more of / less of? When are you happiest?
Your answers to those questions form the basis of your financial philosophy and allow you to adapt your tactics as your circumstances change.
For example, if what you really want is the freedom to work when and where you want, then right now maxing out your 401(k) and other investment accounts might be the right tactic. But down the line, once you’ve built those savings, the right tactic might be to stop those contributions altogether and to start taking money out.
If your focus is on the tactic, you might miss that opportunity. But if your focus is on the philosophy, you will always be open to choosing the right tactic at any given point in time.
Principles over Specifics
Another key to a good financial philosophy is a focus on principles over specifics.
I can make specific investment recommendations based on the options that are available to you today, but those recommendations will become obsolete as soon as your options change.
What’s more valuable is an investment philosophy with a set of principles that you can use to choose investments each time a new set of options is available to you. For example, your investment principles might include a target asset allocation, a commitment to low-cost index funds, a bias towards simplicity, and a preference for tax-deferred accounts.
Those principles don’t include any specific investment choices, but they will help you make those choices each time you are presented with new options.
If, on the other hand, all you have is a set of recommendations based on the accounts you own today, it may be difficult to adapt when your options inevitably change.
Philosophy vs. Planning
It’s impossible to plan ahead for every contingency. No matter how much thought you put into the future, things will always be different than you expected.
That doesn’t mean that planning is a waste of time. It just means that instead of expecting certainty, you should expect an ongoing process in which you are regularly making the best decisions you can with the information you currently have on hand.
A good plan will help you get started. But a good philosophy will make you adaptable and allow you to keep making progress no matter what life throws your way.
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