People do not plan to fail; they just fail to plan

A sailor without a destination cannot hope for a favourable wind

Introduction

Like practically everything, personal financial planning as well is widely discussed on the internet. The most authentic general source where you can learn about the essence, the history, the six steps

    1 Establishing client-planner engagement;

    2 Data gathering and determining goals and expectations;

    3 Clarifying present situation, identifying problems and opportunities;

    4 Developing and presenting a financial plan;

    5 Implementing the plan;

    6 Monitoring the plan

and other aspects of the financial planning process is the website of the Financial Planners Standards Council (FPSC). Here, I want to complement, rather than repeat what one can read about the topic at the FPSC site. In other words, this page offers a more personal, but not comprehensive, introduction, and the discussion of issues that I personally deem especially important and intriguing. This way, I hope, the reader can find some unique value here, and those who consider using my professional services can also get more insight into my approach, even before our first personal contact.

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Health, wholeness, … and finances

There are several kinds of financial services individuals use to help dealing with the monetary aspects of their lives. However, it is only the young profession of personal financial planning that inherently offers the kind of holistic, big-picture approach that is needed in most cases. Consequently, financial planners get the broadest range of education (risk management, investing, taxation, retirement and estate planning, or family law, … just to name a few) among service providers of the financial industry.

This wholeness aspect, the essence of personal financial planning, has strong connotations for me with the concept of health. The World Health Organization defined health as “the state of complete physical, mental and social well-being, and not merely the absence of disease or infirmity”. Indeed, for most, the concept of good life entails more than the lack of physical infirmity: we usually strive to balance various aspects of our lives, and whenever we focus too much on just one aspect at the expense of others, sooner or later our wholeness (our physical, mental, emotional, or perhaps financial state) may suffer.

It follows from this that good financial planning starts with non-financial issues. Exploring the context of planning involves a lot of introspection (’soul-searching’), open communication, values clarification, and consequent goal-setting. It requires, and contributes to the building of, strong relationships, optimally not just between client and advisor, but even more so among people who would be most affected. Traditionally, most service-providers in the financial field have been trained as sales people. They got psychological training of a very narrow type. What is needed for being able to help with personal financial planning is, I think, a more general understanding of what motivates people, and how various pieces of the big puzzle called life interrelate.

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Facing reality

Because of the foregoing, my own approach to financial matters is that of a satisfier, or optimizer, as opposed to trying to be a maximizer. I see ample evidence supporting the notion that there are more things to life than money. In fact, while financial scarcity causes a lot of suffering, research has shown that over a relatively modest level of income or wealth, more money doesn’t necessarily bring increased happiness, or satisfaction. I agree with those who claim that being able to face reality is one of the most crucial qualities of a healthy individual. In fact, it is exactly what I intended to express when I designed my logo, with the crossed-over ostrich sticking its head into the sand, years ago. Facing reality might not seem such a high requirement, but actually often it is, … and there is growing medical and psychological evidence that support putting much emphasis on it.

One of the important realities of our era is that so many changes have been accelerating, and that there are a multitude of things simultaneously going through fundamental, unusual transitions. In the past, human life was much more closely predetermined and following similar patterns. Today, we are (or can be) each more unique. The old patterns of going through more or less the same life stages and transitions – usually even in the same order – than most others, which was the rule for our parents, lost much validity. There are more numerous crossroads on our life journeys, therefore we have to make more decisions than it was the norm before.

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Expectations

The reality of financial planning to be faced is that it is very much needed (because of the myriad interrelations among many aspects of our lives), still not to be assumed as carved in stone and guaranteeing exact results. To be worthwhile, it has to be a cyclical, iterative process, with explicit assumptions (or rather, range of assumptions) used in calculations and forecasts. No professional has a magic wand (holistic planners do not have any holy stick!), and to get to meaningful and useful answers to many impatient people’s ‘What should I do now?’ and ‘Will I be OK?’ type questions, a financial planner or advisor has to bring special expertise, tools and resources to the planning process.

In fact, relying on a planner can be very helpful in the clarification and formulating of the proper questions, goals, and objectives. Without defining success in terms of clients and according to their objectives, the whole quantitative part of the planning process is pointless. However, even if all the ingredients and good starting points are given, there is still not much chance for success, unless the client and the professional communicate and cooperate well all along, … among other things, about their hopes and expectations, identifying and distinguishing competing needs and wants, and the fulfillment of those at various stages.

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Lifestyle change analogies

Some medical analogy is probably not forced here: It is becoming generally recognized that doctors usually cannot really help patients without communicating a lot with them. Also, even if there is a cure found (which in many cases entails lifestyle changes), it will help only if there is a follow through, … and in real life, it is a big challenge. According to Dr. Proulx, Director of the Department of Psychology at Baycrest Centre for Geriatric Care in Toronto, 50% of deaths from the 10 leading causes of death are due to modifiable lifestyle factors. However, for these necessary changes usually

    (i) there is little immediate incentive,
    (ii) the cumulative damage may not become apparent for years,
    (iii) bad habits are enjoyable in the immediate, and
    (iv) health habits [eat well, stay active, and dump the bad stress being the most basic ones] correlate poorly.

Due to these factors, change is difficult, and 97% of patients fail to adhere properly to lifestyle recommendations. The situation is not much different in the financial fields either. This is why it is so important for client and professional to be, and communicate regularly, on the same wavelength: this relationship can be one part of the social support systems so much needed for healthy lifestyle change and maintenance efforts.

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Dealing with the future – change and continuity, foresights and usefulness

We engage in personal financial planning because we want to increase the chances of a desirable future happening. We are concerned about a multitude of changes (Remember?: ‘Even the future is not what is used to be’), and wish to either influence them or protect ourselves from them. At the same time, we see that some undesired things remain the same, so we wish to induce change of / around them. It seems that someone who is just utterly pleased with the way all things are is either a very rare creature, or s/he lives quite well insulated from reality. These alleged few perhaps would not benefit from planning; those others who want to initiate or influence change will do. Change commands much of our attention; however, it’s important to realize that there is also continuity in the world.

Without continuity, we could expect hardly any insight into the future, without which one cannot speak about planning. Actually, we couldn’t live for one day if we could not rely on things and phenomenon staying unchanged. Even certain kinds of change have the element of continuity: change happening according to some trends or patterns can be relied on, to some extent and with some extent of confidence. Another kind of change, the discontinuous, the non-linear, less predictable one offers not so much opportunities but rather challenges for planning. Of course, the distinction can be not quite clear sometimes: predictability is never absolute, and we can only estimate how confidently we can predict or extrapolate things.

Dealing with uncertainties and change can be both stimulating and invigorating and (more often) worrying or even depressing and paralyzing as well. It takes courage, creativity, determination and discipline to formulate visions of the future and work out plans that will likely lead to these. Various emotions, thinking skills and techniques, as well as insights into potential realities are always involved. If our goal is not to predict the future (which would be impossible anyway) but to improve it, we must abandon the notion that we must have absolutely certain knowledge before we act.

We have to think in terms of trends, scenarios, contingencies, and simplified mapping of reality to be able to come up with any meaningful plan. Many people think that it’s not a worthwhile undertaking, it’s impossible, and all what this section is about is just gobbledygook. For them, ‘long-term, and life planning’ seem to be oxymoron, and the only sensible posture regarding the future is passivity (calmly or otherwise). In the next section, I try to address the issue of fatalism.

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Arguments against fatalism – the right stance, and our chances and responsibilities for planning

Since change is so obviously everywhere, and since it has been accelerating for quite a while, many people today feel that they have no power over the turns of their lives. In his book, Futuring: The exploration of the future (on which this and the previous section is largely based), Edward Cornish characterized fatalistic attitudes as ones ‘that have long impeded both individual and human progress’ for good reasons. While the other extreme, hubris-induced feelings of omnipotence (which is, I think, an almost equally dangerous attitude, and which I address more elsewhere on this website) has not disappeared either, I see why he thinks: ‘Fatalism is more dangerous than ever because there is so much more that we can now do about our futures than we ever could in the past.’

While fatalistic attitudes of believing that we are just spectators can be understood psychologically, its ‘dark appeal’ is mainly due to the fact that it ‘reduces our shame about past failures as well as our guilt for continuing to do little to gain success’. ‘If the future is predetermined, nobody can hold us responsible for any bad things we do. … Fatalism provides absolution from all sins, failures, weaknesses, or whatever.’ Besides the emotional appeal, Cornish offers three intellectual half-truths as well that may sound persuasive as supporting the notion of fatalism, but (as you should expect from half-truths) are actually very dangerous.

The three half-truths are about the:

    – knowability of the future,
    – improvability of the future, and the
    – urgency of the future.

Half-truth #1: We cannot know anything about the future. The whole truth is a bit more complicated. It acknowledges that we cannot know anything with absolute certainty, but also that our partial and probabilistic insights are extremely valuable and useful. It’s because of the already mentioned continuities of various kinds. Exploration leads to knowledge, and any knowledge about what is really important is worth more than piles of knowledge about what is quite trivial.

Half-truth #2: We cannot do anything about the future. The whole truth acknowledges that as individuals we have limited power to shape the future of the world, but also that we do have much more power to improve our own life, and often a few or more (perhaps many more) other people’s lives. We are not prisoners of fate, and the future doesn’t just happen to us. We all can list people who achieved a lot, despite their circumstances, and we can easily find startling differences in the life story of people who started out from the same place (family, situation) still walked very different paths, because they choose so, and because they persevered.

Half-truth #3: We shouldn’t spend time thinking about the future because we have too many immediate problems to deal with. The whole truth says that there can, and should, be a balance found between the need to take care of immediate emergencies and other issues, on the one hand, and thinking about the future, on the other hand. ‘We can always find time if we recognize that it is really important and urgent to think about the future.’ The urgency comes from the accelerated pace of change everywhere. More and more, we create our own future, and it takes foresight (of both potential dangers and opportunities) to do it with the hope of success.

Cornish uses the card game of bridge to illustrate the interplay of chance and preparedness in the outcome. Novices can win a game or two against seasoned players sometimes. However, ‘better choices sooner or later tip the odds of winning decisively toward those players who can anticipate what will likely happen when they play the cards in their hands. In life, good choices probably are even more determinative of success than in bridge. In the game of life, people with superior foresight can invent an extraordinary number of ways to minimize the effects of any ‘bad cards’ they are dealt and will exploit whatever opportunities are allowed by chance.’

With good foresight we might even ‘snatch success from disaster’, while with poor foresight we ‘may turn a stroke of luck into a catastrophe’. It’s a big mistake to attribute all success to just luck. Futuristic thinking and future-orientation are not the same as fruitless daydreaming and navel gazing, and they don’t have to lead to the neglect of the present and more immediate issues. The future, our future, has the chance or promise of both great successes and horrible calamities. Instead of getting paralyzed by these potential extremes, we are better off getting down to doing what we can do about it, creating the future we want, … without perfect guarantees for anything. Personal financial life planning takes effort, knowledge, skills, support, and tools. Most importantly, it takes what Cornish calls the ‘probably the most reasonable and constructive attitude we can have toward the future’: … ‘either concerned hope (if you are an optimist) or hopeful concern (if you are a pessimist)’.

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A key life planning tool and its advantages

What made the emergence of financial life planning possible in the last few years, from the technical side, was that computing power (both hardware and software performance) has reached a level where dynamic modeling of complex, non-hiearchical systems (what our life stories are) is finally possible with reasonable accuracy. In a bullet point format, these are the main advantages of the life planning approach, enabled by this new-generation software, over the more traditional, mere ‘number-crunching’ type financial planning:

Financial life planning software …

  • provides best opportunity to credibly model complex, dynamic, and detailed life scenarios;
  • helps clarify your vision of life, and connects immediate wants, wishes, and needs with long term ones; it can simultaneously deal with both strategies and tactics.
  • by enhancing learning and understanding, it creates solid base for decisions; it decreases the need for, and enhances the chance for success of inevitable improvisations, or quick decisions
  • while accurately tracks a multitude of ‘number-crunching’ details (in the background, and available if wanted), it still places the emphasis on distinguishing major factors from minor ones
  • facilitates creating with ( not ‘for’!) clients life plans that are meaningful, aligned with their values, financial attitudes, and risk tolerance; thereby, realistic / worth to keep and follow
  • whenever the client wishes (due to changes in objective or subjective circumstances) it is convenient to update or adjust it, and to do explorations of alternatives; it calculates the monetary implications of intended or unexpected life(style) changes, and various priorities, decisions, actions, or inaction.
  • produces actionable and focussed to do lists.

It is important to realize that this sort of software is an inevitable component in a life planner’s tool chest.

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A complementary approach, or indirect description: What financial life planning is not

Often, it’s easier to understand the true nature of something if we focus on the the differences as well that separate it from other things. From a distance, especially for the untrained eye, a mule might look like a horse, or vice versa. There is some validity in it, of course, for some purposes. However, if you want to start a breeding operation, e.g., it’s better if you know the difference. (In case you didn’t major in agricultural sciences: mules are the crossbred of horses and donkeys, and they are infertile.) For some people, an accountant and an investment or insurance advisor seem to be the same: they all deal with money. However, if you want to breed your money, it’s better if you deal with the right kind of professional.

It’s easy to get this kind of wrong (therefore potentially dangerous) perception about personal financial planning as well. For some, it may appear to be totally a private business, done intuitively or more consciously, but certainly not relying on outside professionals. For others, this topic seems to be totally the realm of professionals, whose input (knowledge, experience, up-to-the-minute information, special tools, etc.) is there to guarantee (or at least, predominantly determine) future success. While there are elements of truth in these views, they are quite inadequate.

Financial life planning is NOT simply a cerebral, rational business, to be left for experts. On the contrary, it has a lot to do with emotions, intuition, and the irrational as well. It is NOT about foreseeing or predicting the future either, NOR about soothsaying or promises / guarantees for success and happiness. It is NOT even about financial assets only. (Human assets, relationships, fears or dreams are equally important factors, e.g.) IT IS first and foremost about the process of learning and understanding (yourself, your circumstances, … and yes, the outside world and many intricacies of financial markets, policies, and regulations as well), exploration (of threats, risks, opportunities, … potential futures), goal-setting, and behaviour. Building and keeping good habits and routines are fundamental for success. Because of all these, planning should NOT be a one-shot activity either: on-going cooperation and commitment are paramount. It is NOT happening along a straight path either, … NOT a once-a-year celebratory march on wide, ornamented boulevards. The metaphor of explorers, scientists, or entrepreneurs instead is much more enlightening: Personal financial life planning is relentless search, an iterative process, requiring occasional, open-minded modification of means, tactics, or even strategies and goals, … whatever needs to be changed. The main benefit is in the process and learning, and definitely not a particular document, even though documentation is important as well.

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