As we welcome the new year and leave the first 100 posts of this blog behind, I want to share with you something that has been on my mind.
On this blog I’ve covered topics ranging from basic to advanced, from explaining details to compiling all-inclusive checklists. All the posts were answers to unique questions that globetrotters face. However, they were all over the place.
I think it reflects how we as globetrotters commonly manage our finances and seek solutions. During tax season we thought about needing to file in multiple countries. When we moved, we realized we need to figure out how to keep our accounts alive. When we tried to save, we found out that the common vehicles are not available to us. We are constantly in a problem-solving mode.
A framework to manage your finances for global living
In my financial planning practice, this is not how I help clients manage their finances. While people do come with immediate problems, and we solve them, what is more important in our working relationship is:
- Taking a step back
- Looking at the big picture
- Thinking about priorities
- Determining the steps to take
- Setting a schedule to accomplish them
- Evaluating the situation after steps have been taken
- Repeating from the top
It occurs to me that to start the year right, we should finally take a bird’s eye view of how to manage your finances for global living. I hope this will help you get out of the crisis mode and begin your year with a systematic, organized way to look at your finances.
The Three-tier Framework
When you think about financial planning, what comes to mind? Is it so that you have a system you can set it and leave it? Have someone help you with certain major financial decisions? Or making sure you are covering all the bases?
As a practicing financial planner, I can easily say that it’s all of the above and some more. However, people are not always aware of the different types of financial decisions they are dealing with, and often times want to apply a single solution to solve all problems.
For example, some people think they can automate everything personal finance once and for all so they don’t have to worry about it all the time. What they forget is that before automating anything, you need to make some key decisions about how you wish to live your life. On the other hand, some people focus so much achieving their goals that they forget that simple tasks like checking your credit reports annually for fraud are important too.
In my opinion, to manage your finances effectively you need approach different types of financial tasks with appropriate methods. Below is how I break it down:
To me, this category encompasses all the things every adult needs to do, regardless your circumstances, income or wealth. The reason I call it wellness is because these are the fundamental things you need to do to protect your life against the downside. You may have low income, but you still need to get your tax withholdings right and file tax returns. You may be a billionaire with no need for credit, but you still should take steps to prevent your identity being taken for fraud. Regardless of your circumstance, if you are eligible for any public benefits, you should know they exist and how to apply for them.
The unique thing about these wellness tasks is that they are repetitive, but you cannot automate them. If you don’t have someone or a system to remind you and encourage you, you can easily forget or put it off forever. However, your tendency to not pay attention to them regularly doesn’t diminish their importance. If you tend to ignore tasks in this category, it’s best to have an accountability partner to keep you on track.
Below is a list of tasks in this category:
- If employed, check your paystubs to make sure you understand all the earnings and deductions
- If running a business, keep books regularly for both income and expenses
- Setup withholding or pay estimated taxes correctly
- File your tax return accurately and timely
- Evaluate changes in need for insurance coverage to protect against financial catastrophe
- Check credit report at least annually and freeze credit when appropriate
- Take out credit responsibly and make payments on time
- Understand and claim eligible public benefits – old age, medical, disability, unemployment, low income assistance
Rules and Systems
This is the category that you can “automate.” Many busy professionals I know want all of their financial life to fit into rules and systems so they can care less about managing money. Ironically, not that many of our personal financial tasks fall into this category. Nevertheless, having rules and systems not only save you time and mental energy, but also help you bypass your behavioral biases. It helps us preserve our mental capacity to make decisions that we cannot automate.
The two major areas of our financial lives that fit into this category are:
Household cash flow system
It is more than the traditional “budgeting.” A household cash flow system, as the name suggests, determines how your cash goes from your paychecks or business accounts to different personal accounts for purposes such as spending, debt payment, saving, and investing. Once you’ve got a comprehensive plan that dictates where each of your dollar should go, you can automate it without having to figuring out what to do every month.
Investment management is another area where automation will help. While your household cash flow system may include a periodic contribution, you need a separate investment policy to help you determine when you make changes to your existing investment at any given time.
It’s great if you have an investment manager that lays that out and does it for you. If not, I recommend you put your investment policy in writing. This is so that you have something you are able to follow, no matter how you feel that day about the market performance.
For example, a simple investment policy may include:
- Benchmark – what asset classes you are investing in and in what percentages
- Rebalance – when will you review your portfolio to make sure it still resembles benchmark
- Reassess – how will you decide whether to change the benchmark
Note that in order to get to the rules and system, you still need to make the decisions first on what they should look like. This leads us to the last category.
This category contains the tasks that take both halves of your brain. Normally when we talk about decisions, we associate the term with logic, analysis, and deliberation with knowledge. However, since the important financial decisions are also life decisions, our feelings, emotions, and intuitions come into play.
Before worrying about how to save on taxes or how to invest, ask yourself:
- Are you living the life you envision?
- Are you bringing positive influence on people around you and to the world?
- If not, what steps are you taking to get there?
- What other meaningful things do you want to pursue?
With the answers to these questions, you’ll naturally move on to prioritize and reassess the analytical part of the financial decisions, such as:
- Develop your career, human capital, networks, and personal relationships
- Keep costs (expenditure, tax, financing) low in the long-term
- Design an investment strategy that will help you meet your long-term goals
- Pass on assets efficiently and according to your wishes
The Framework in the context of global living
The framework I just laid out apply to everyone. Of course, for those of us who move around the world, there are additional considerations. I’ll use a table to summarize.
How to apply the framework
I organized all our financial tasks in this framework by how we should approach them. It can be pretty overwhelming to make sure you’ve done everything. Even with a master checklist, you’ll soon realize that it doesn’t necessary help you organize, because it’s the wrong tool to use on the tasks requiring decision making.
Below are some potential ways you may approach the three different types of tasks:
- Create a master list and set a reminder to go through it at the same time every year. Get an accountability partner to do it with you.
- Sign up with a financial wellness program that include these tasks.
- Work with a financial planner that builds these tasks into the service calendar.
Rules and Systems
- Set it and leave it – do not need to track it because it does not change.
- Follow the written investment policy – do not allow yourself to deviate from it.
- Have a pre-determined timeframe to revisit changing the rules and systems.
- Have open dialogue with your spouse regularly about life’s decisions.
- Work with trusted advisers or coaches in specialized areas.
- Go through the financial planning process with the help of financial planner.