This being the first blog post for Next Gen Financial Planning, I’ve thought a lot about which topic I should choose to write about. Perhaps I could channel my inner nerd as a financial planner and start with a more technical financial topic, such as explaining a complicated tax issue or comparing different investment strategies. Or maybe I could try to be more relatable and answer one of the questions that are frequently brought up by the young professionals that I work with, such as how to buy a house or what financial issues you should be thinking about as you have your first child.
Instead, I think I’d like to begin by asking you a question. It’s the same question that I ask every single financial planning client at the very beginning when we start working together. People are often surprised that this first question has absolutely nothing to do with their investment accounts, or their income, or taxes, or insurance, or anything else that they expect financial planners to typically ask about.
The first question in financial planning is this: What do you REALLY want in life?
It’s a question that seems quite simple at first glance, almost to the point of absurdity. But it’s a tremendously important question that most people have a really hard time answering once they are forced to actually try to, and one that has a substantial impact on determining which path our discussion will take from there.
I ask this question because the answer has (or should have) an impact on every single financial decision you make. In fact, every decision we make in life is a financial decision in some way. Financial planning isn’t about fancy spreadsheets, colorful charts, arcane tax codes, and complicated investment strategies. It’s about using money as a tool to design our ideal life.
I’ll say that again here, because it’s critically important: Financial planning is not about numbers, it’s about using money as a tool to design your ideal life.
Want to travel the world? That costs money, results in less income that you could have otherwise been earning, forces you to convert your money into foreign currencies, and may require you to think about special insurance.
Want to have kids? Be ready to buy tons of diapers, get a life insurance policy for yourself, decide how (or if) you want to save for their college education, and learn about the various tax credits you might be eligible for.
Want to start a business? Go see the Olympics every four years? Quit your job and spend your days serving a charity that rescues sick puppies? Go live in the woods, Walden-style, to “find yourself”? All of these are financial decisions, if for no other reason than because of the associated opportunity costs.
Create YOUR financial plan, not somebody else's
When we talk about making life-changing decisions, finances are an integral component. So when a client asks me a question like “How much money should I save for retirement?”, it’s impossible to give them a meaningful answer without knowing more about what it is that they really want to do with their life and what their personal values are.
Few people actually put in the effort to create a financial plan, whether by themselves or with the assistance of a professional financial planner. For those who do, the process often starts with an assessment of goals. As important as these goals are, they don’t provide perspective on the big picture, the “why” that lies beneath the surface and which truly drives you. Goals are the tangible results you seek, while your core values are what make the pursuit of those goals genuinely meaningful to you.
What does “retirement” actually mean to you, and why do you want to retire? If you see yourself following the typical pathway of working and saving for 40 years and then sitting on the beach in Florida until you go into a retirement home, is that because it’s actually what you want to do? Or is it because that’s what you’ve been told you’re “supposed” to do? Oftentimes, forcing ourselves to answer the question of why we want something will change our answer. You may ultimately make the same decision after thinking this way, but for much different reasons.
If your vision of retirement includes spending your days gardening or restoring classic cars in between visits with family members, then why wait until you’re 60 or 70 years old to do that if you know now that that’s what you enjoy? Arrange your life in a way that allows you to spend your time doing those things now. Find ways to get paid for it rather than doing it indirectly and taking a long time by saving and waiting for most of your life. Think you can’t do the things you love now? Why not? You may find that if you actually list out the reasons, you’ll find them to be surmountable after all. Don’t be afraid to challenge common assumptions and beliefs. This is your life to design, nobody else’s!
Financial goals should not be stated in terms of numbers, they should be stated in terms of how your financial situation serves you to help create your ideal life. For example, “having XXX dollars saved up” is not a real goal. If it were then you would stop spending money on anything that wasn’t absolutely necessary for your survival, and work as hard as possible to increase your income. Similarly, “paying less in taxes” is not a real goal. If you want to pay less in taxes, you could simply earn less money. Having more money just for the sake of having more money is pointless, the true power of money is only realized once it’s used to allow you to do the things that you really enjoy.
Be intentional and purpose-driven when making financial decisions
Most of us don’t know exactly what we want in life, or we’d be a lot closer to it than we are now. This soul-searching and personal exploration is the most difficult part of financial planning, but also the most important. If we do it right, we end up living a life that truly reflects our biggest dreams and most closely-held values and beliefs. If we do it wrong, we might end up either the richest corpse in the graveyard or live in constant stress for our whole lives while we overspend in an effort to impress our neighbors with how much cool stuff we have.
We make many decisions in life, and the path that we take is often determined by those choices. Unfortunately, we rarely stop to consider what we want the destination to be. We do things almost on accident, rather than by design. But once you know what it is that you really want, it’s much easier to find a path to achieve it.
You can’t create a financial plan just by looking at spreadsheets or software, trying to make projections about future investment returns and inflation rates and tax brackets. Real financial planning puts the person first, and the numbers second. One of the biggest secrets about personal finance is hiding in plain sight: it is very rare to find a “right” way of doing things.
Should you get a 15 or 30 year mortgage? Should you pay off your student loans early or put that money into your Roth IRA? Should you take the high-paying corporate job with great benefits or join that scrappy little startup that a few of your buddies from college are putting together? None of these questions have a clear answer. Almost any decision could be correct based on your individual circumstances and what you want to achieve. In my work as a financial planner, my favorite response to most questions I’m asked is “it depends”, which often frustrates the asker. Frustrating or not, this answer contributes to a necessary shift in mindset towards giving me the ability to respond in a way that is most likely to ultimately lead to their happiness.
So what is it that you really want your life to look like, if you were to let go of your preconceived notions of what you think the trajectory of your life is supposed to be? Do you think that creating a plan makes you more or less likely to achieve your definition of financial success?
I hope that this first post has caused you to pause for a moment and really reconsider what it is that you’re currently working so hard for, and what you really want in life. Having a “why” makes it so much easier to make financial decisions and, more importantly, to take intentional action towards making the outcomes of those decisions come to fruition. My goal with future blog posts here is to make you think about things a little bit differently, and to explore a lot of the philosophy and psychology of personal finance instead of just the technical topics that you can read about in literally thousands of other places.
I’ll end with one of my favorite quotes from Henry David Thoreau’s Walden, a literary classic about living your ideal life even if it is outside of the routine:
“If one advances confidently in the direction of his dreams, and endeavors to live the life which he has imagined, he will meet with a success unexpected in common hours. He will put some things behind, will pass an invisible boundary; new, universal, and more liberal laws will begin to establish themselves around and within him; or the old laws be expanded, and interpreted in his favor in a more liberal sense, and he will live with the license of a higher order of beings.”