If I were to ask you, “Which strategy is best for your financial plan?” Would you know the answer? Would you think that there is just one right answer that made sense for everybody? Oftentimes when I read financial articles on the internet, I will see the approaches taken are generally one size fits all. All debt is bad. Save 20% or you will end up broke. Invest it all in Bitcoin because YOLO! But there is no one right answer for everyone. Personal finance is as much personal as it is finance. We will take a look at what strategy might make sense for you in this weeks Inside Look at Building Towards Wealth.
Academic finance is devoted to finding the mathematically optimal investment strategies. I have found that in the real world, people do not want the mathematically optimal strategy. They want the strategy that helps them sleep at night.
I believe that we think about and are taught about money in ways that are too much like Science (with defined rules and laws) and not enough like psychology (with emotions and nuance).
There are many factors that go into making the best financial plan for a specific individual. By looking at what could be important for an individual or family, both during their accumulation years and their distribution years, two people may have vastly different views about what is the best plan. It all comes down to what the person wants out of their life.
We can all make assumption about how long we will get to work, or what the market will return for the next 20 years. The truth is we do not know those things with any high degree of certainty.
We all tend to make projections based off our current lifestyle. Our plan could be wrong not because we projected our current needs incorrectly it could be result of an unexpectedly changing life, plain and simple.
For how long we will work, we could become sick or injured and unable to work, our industry could radically change and leave us out of a profession, or we could just burn out from our company and no longer want to be an entrepreneur.
I can tell you how much the market has returned in the past. But neither I nor anyone else can tell you what it will return in the future. We can make projections, but they are educated guesses at best.
What we can control is how much we save. We have the largest control over our lifestyle. Do we have the bigger house, the nicer car or the larger savings account?
Having more control over your time and options is becoming one of the most valuable currencies in the world. That’s why more people can, and more people should, save money.
- Morgan Housel Psychology of Money
Whether you want to retire early or never retire but have more control over your life increased savings rate is a good place to start.
Savings without a spending goal gives you options and flexibility, the ability to wait and the opportunity to pounce. It gives you time to think. It lets you change course on your own terms. It also is a step on the path from Rich to Wealthy.
How you invest will be dictated by a combination of that savings rate and what your ultimate goals are. Do you want to leave a legacy behind? Do you want to have the highest possible income in retirement? How important is charity? These and a dozen other questions will determine which direction your planning should focus.
You know what else they should do? Stop trying to be so rational. Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run, which is what matters most when managing money.
- – Morgan Housel Psychology of Money
What are some of the things that we think about? Is final wealth or legacy important for a person? I know, for my wife and me, legacy plays an exceptionally large and important role in the way that we are structuring our plans. That is neither right nor wrong, it is just what we want. We want to be able to give our children and our grandchildren, every advantage that they can have in the future.
So, what does that mean for us? It means, that we are planning to spend less during our lifetimes because leaving a legacy for our family is more important. Depending on what is most important to an individual will determine their path. No one’s path is going to be the same and it all depends on what you want and how you want to do it.
The probability of success with your financial plan is especially important to think about. One must consider the possibility of changing their plan in the near or far-out future. It is important to think about how much a plan could change and if it will be easy to adjust throughout a lifetime, you need to think of the possible risks that will most likely occur. It is important to be aware of the possibility of sleepless nights due to accounts dipping.
One must consider how much risk they are willing to take upon themselves, versus giving that risk to insurance companies. Would you prefer to have to work longer? Would you prefer to perhaps decrease your spending in retirement? These are just a few of the factors that you will run into when trying to determine which financial approach is best for while planning for your future.
You will see a great deal of time, energy, and words spent on the internet and magazines, talking about how one approach is horrible or a “rip off” or inadequate compared to others. I will say it right now, I do not believe that to be true. The only bad approaches are the ones that don’t work for you and your situation or the one you can’t stick to.
However, not everybody is trying to reach the same destination and not everybody has the same goals. There are many different paths to get to where you want to go. The most important thing is that you find one that fits your lifestyle and on that is in accordance with your values. This will always be the most important factor.