The title is taken from a famous book as below. Even though it is meant to be a management philosophy, it applies to the subject of personal finance as well.
Financial Planning does not work?
There is a proverb in the military – Plans are good till the first bullet is fired.
Some of us who are obsessed about managing or advising on personal finance can go really overboard with planning. Have you heard about those retirement numbers, college planning or even financial freedom number?
While long term planning is good, problem with personal finance is that it is a not a standalone aspect of your life. It impacts and gets impacted by life events – birth/death/marriage/divorce in the family, choice of career or college, changing goals and circumstances and finally your own priorities may change.
How my circumstances kept throwing my plan astray
Lets take an example in my case, as I transitioned from India to US.
Till 2005, I did not know a zilch about managing finances. In fact I was pretty bad at it, just enjoying my life and like many, used to blow up my entire paycheck in frivolous expenses, needless shopping and eating out. So in a nutshell there was no plan.
Then in 2005, I decided I can at least start investing some money out of my paycheck. Good plan but was it anything long term? No it was too flaky as I jumped from one hot fund (mutual fund) to another. This was the time when the Mutual Fund and Private Insurance industry was taking off in India in a big way. I also lost money investing in an insurance plan (actually a bad plan) that was masquerading as investment.
Eventually as I got better with finances, I actually created a long term plan complete with everything – retirement fund, children’s education fund, vacation fund and corresponding projections several years into the future. I built separate portfolios for each, and tracked them to utmost precision even calculating year after year growth.
However God had other plans for the family. In a series of unfavorable health and personal issues, we decided to move out of India at least for a few years and relocated to US.
This obviously altered my earlier plans completely, since my place of work and source of income changed. The retirement numbers started to look different, the college education fund seemed minuscule when compared to US college costs and all the plans are to be redone again.
Well what do I plan for now? I don’t even know whether I am going to move back to India again in few years or not.
In a global economy mobility is a part of life and no one stays in the same place or country throughout their working life. Moreover as you move, international taxation is another beast which can alter your long term investments (like tax sheltered) into immediately taxable entities.
Plan to adapt, not adapt to a rigid plan
So finally you have to take into account an ever changing plan, moving from Plan A to Plan B and keep adjusting according to your circumstances.
When I read about estimating expenses at retirement, I wonder how can someone calculate that? Following factors and more can make it completely non-deterministic.
- Where will I retire? Different cities and countries have vastly different living and medical costs.
- Will it be only me and my wife? What if the children stay with us?
- What do I want to do in retirement? Will I work or travel more?
- What health condition will I be in?
- What other obligations (including social and family) will I have then?
So projecting your expenses at retirement based on today’s lifestyle is like predicting the weather 20 years from now, based on 20 years of past data.
Same goes for College funding. Even if you are saving in 529 or other accounts, do you have a goal or a number in mind? How do you arrive at a number for college costs, when the costs are going up every year? Isn’t that also as variable as retirement? The following factors come to my mind immediately.
- Do you know what career will your 5 year old choose when he/she turns 16-18?
- Do you know which college will she go to? Ivy Leagues, State or Community colleges? Are the costs not vastly different?
- Are you even going to stay in the same state or country when the time comes for college?
In today’s volatile world, planning too far away (more than 3-5 years) is futile.
Planning based on solid principles, not circumstances
The best way to plan your finances is to look at your current goals, aspirations and develop good money habits.
Below steps will help you be in control and act nimbly to adapt to changing situations.
- Live below your means – no matter which country or which circumstance you are in, you can always strive for this and become better. Living below your means is common sense, yet so uncommon.
- Budget – Goal based budgeting – This is very important as it ensures you have control over the cash inflows and outflows. Again something which does not change with your place of work or future plans.
- Invest with simplicity – Find investments that are easy to understand. Index funds, mutual funds, Real estate, CDs and savings accounts.
- Keep some portion of portfolio liquid – Sometimes this can be called an Emergency Fund or Contingency Fund. No matter what you call it, it is useful. When I moved from India, I kept a portion of my India portfolio into Fixed Deposits (similar to CDs here in US) and then built up an emergency fund in US too. This gives me option in both places if I decide to just leave work for some time or get laid off.
- Remain consumer debt free – This is also related to freedom. Except for one mortgage in US, I am completely debt-free otherwise or rather bad-debt-free. Being debt free coupled with a portion of portfolio in cash, gives you plentiful of options to enjoy life at your own terms.
- Keep investing for long term – Unless your investments are in countries with troublesome political climate, long term investments (a part of the portfolio) can be left to grow with time. Long term investments work on the principle – its not market timing, but time in the market that will reward your investments.
To plan and execute above steps in the most efficient way, read the following posts.
Finally do plan but let life change it
Money decisions should not dictate all your life’s decisions. Money is only a tool to live a good life.
Let your financial plan adapt to your own goals and aspirations, rather than rigidly follow personal finance gurus and templates.
If someone screams in YouTube to pay off mortgage, it does not mean you have to follow as your plans may be completely different. Similarly you may not fall for all those high reward promising credit cards if you are not going to use those benefits.
A chess player does not know what the board will look like after the next few moves.