FAQ  #1. Why should we bother with financial planning at all?

Financial life planning is an important aspect of dealing with our personal future. At least within limits, we can influence what is ahead of us. The essence of planning has nothing to do with either gazing into crystal balls, or exact prescribing of future actions or especially outcomes.

Its benefits are basically twofold: First, it helps us to learn (about ourselves, about causes and effects, about consequences of choices and /in/actions, about probabilities, about complex relationships and interactions, etc.), thereby preparing us to respond in better ways to both expected and unexpected future situations. Second, in addition to the previous (more cerebral, intellectual, or economic) advantages, there are the motivational, emotional or psychological advantages it provides: It can help us to develop more realistic expectations, and to live a more meaningful and satisfying life now and in the future.

The reason for the need for planning is not that with it we can exclude uncertainties from our lives totally. However, we can exclude at least some of those, and having a picture of various scenarios can help us to respond well to unfolding events. Many of the needed (optimal) responses require certain preconditions (e.g., having a will, a power of attorney, or a proper insurance policy, or setting up a savings program or an investment strategy). We do not prearrange these things if we do not think about various alternative futures. Risky situations may unfold suddenly or very slowly; actually, so slowly that we tend not even to notice or properly evaluate them. Planning is basically about these long term processes and whole situations, … seeing both the trees and the forest at the same time. Nothing is (or has to be) carved in stones: our circumstances change and we ourselves (our ambitions, dreams, resources, capabilities, etc) change too. This aspect doesn’t render planning futile, but it highlights the importance of revisiting our plans from time to time. Planning will not answer many of our questions, but it will help to pose some better ones than we would have without this activity.

Numerical calculations are an important part of long term thinking, since without them it’s almost impossible to understand the cumulative effects of even small differences in inflation, savings, investment returns, costs, taxes, and the like. With formal comprehensive planning the usefulness of thinking and communicating about the future, and making related commitments can be greatly enhanced.