Know what you want and be flexible

In my last post about creating a one page financial plan, I wrote about how you should first discover what kind of life you want, or would like to build together with your spouse, before planning your finances. I went on to encourage you to be specific on what, when, and the cost involved to accomplish your goals in life, so you can plan meaningfully to achieve them.

That sounds nice and easy, right? Deep inside you probably feel it’s not that simple, especially when we may not know how long we can stay in our current country, or have no control over where we go next. Our transient lifestyle inherently makes it difficult to see things far ahead with clarity and purpose. Even if we try, sometimes life abroad just changes our directions in unexpected ways. For some, maybe one of the reasons you started this lifestyle is because you didn’t know what you really want out of life, so you picked an opportunity that allowed you to explore as far away from your comfort zone as possible.

That was certainly true for me for a long time at the beginning of my global nomad journey. I left the country that I grew up in, in search of a purpose and a professional career. It took me eight years and four countries to find it, with a lot of trials and questioning. It’s not like I was sitting around doing nothing. In fact, I had a much busier life than I do now, but in that period of time I always felt whatever I was doing wasn’t what I meant to do; yet I had little insight into how to move on.

Even now, while my professional goals are much clearer, our life goals are very much fluid. We have a good idea of the way we want to live our lives in our daily existence, but I don’t have a clear picture of where our global journey is taking us and where I want to end up. I’m enjoying this process of still exploring different parts of the world, and have no idea where I’d wish to call home eventually. On the other hand, we recognize that this constant transition can cease to be right for us at any time, and we need to be prepared for that day. In short, if I were to itemize our three goals, they would be extremely vague, with no when, where, or how much they cost.

Does that make me a hypocrite for suggesting everyone should develop a set of life goals? No. It just means that you need to acknowledge that you are on a quest, and you should build in flexibility within your life goals. You want to make sure you have the flexibility to maneuver in a new direction you have not thought about before. What you don’t want to do is to pretend you know what life is all about already, and set strict, conventional goals for you and your family because you thought all grown ups live life a certain way.

I definitely think that life is a journey, and we need to allow our future experiences to change us. Embrace the possibility that the goals you have now, however clear or vague, may change. More precisely, our goals evolve, just as our lives take different turns. As your goals become clearer or change, you need to readjust your financial plan to be aligned with the new reality. Allowing that flexibility in your original financial plan is critical. You don’t want to be stuck with a rigid plan for no longer desired goals for the rest of your life, both in your mind and with your finances. Whether or not you know what you want yet, you need to be adaptable to future changes in life, because they will come.

So how do you build a level of flexibility in your financial plan in general? Here are some practical steps:

#1: Preserve liquidity

To make any changes in life, you need to have resources at your disposal. Liquidity simply means that your resources can be delegated for a different purpose as your goals evolve without too much constraint. The opposite is to tie your resources down to assets or accounts with a single purpose. When you have a change of circumstance in life, you may not be able to utilize the money the way you want. Even if you are able to, it may come with much higher cost.

A good example is investing in real estate. It can be profitable if you have a clear purpose for the investment and realistic expectations of its return. However, if you simply do it because you don’t know what to do with your extra cash, a large portion of your wealth and income may be tied down to a single property that you may or may not be able to sell quickly without losing money when you finally know what you want.

Other potential liquidity killers include some pre-tax retirement contributions and college savings accounts. They are great for helping you lock in the resources for a particular purpose – for college or for retirement after you turn 59 and a half, but to use it in other ways at other times, you pay a penalty for it (with some exceptions.) Focusing on the short-term, you may want to simply take all the tax advantages you can get, but that may not be the best thing to do if you need to be flexible.

Note that preserving liquidity does not equal keeping everything in cash. You can still invest in publicly traded securities that have high liquidity in a taxable account, but take the risk of losing (or earning) money if you need to appropriate it for a different use on short notice. It also doesn’t mean you should avoid tax advantage accounts and real estate at all cost. You just need to be aware of the opportunity cost, and what options you have to lower it. For example, a Roth IRA, though a type of tax advantage account, gives you more flexibility with taking out your initial contribution. It can be a vehicle to help you preserve liquidity.

#2: Maintain good credit and availability

If you already have relatively low flexibility with your assets, it’s more important that you have access to credit to “buy” flexibility (with future interest payments.) In general, I do not encourage people to utilize credit heavily in their personal finance; however, it is a useful tool. While you don’t need to use it day to day, you should make sure you have a good enough credit history to take out loans when it’s in your best interests to do so. This means that if you have loan obligations now, always make sure you can at least make the minimum payment to stay current. More importantly, check your credit reports at least once a year to make sure that your credit history is reflected correctly, and that no one has stolen your identity to take out loans.

In addition to credit card or other types of unsecured debt, sometimes you may have access to lower cost credit that is backed by some type of asset. For example, you may be able to access the equity in a property you own. Some other sources may include the cash value in a whole life insurance policy, or from your employer sponsored 401(k) plan. So do your research in advance on what other sources of credit you may have access to. Remember, credit should be used as back up or for bridging a short-term gap, not as the main funding source for your goals.

#3: Leave some slack in your budget

Our daily cash management can be our main source of flexibility. If your fixed expenses eat up most of your income, it would be hard for you to contribute to making a change in your future direction. No matter what kind of financial situation you are in now, take a look at what would happen if your budget “takes a hit.” Are you able to continue to live life as normal or will you need to scramble? Will you be able to continue to save for the long-term or have to stop for a moment? Don’t plan your full paycheck to the brim. That way you have some room to breathe when things change.

On the flip side, the slack in your budget gives you the room to make extra savings if you don’t end up needing it. It requires you to be disciplined and not take up expensive spending habits that may fill up the slack you have built in your budget. If handled carefully, it’s a great saving opportunity.

#4: Build and diversify stable income sources

If you are not sure what your direction would be in the future, you may not want to bet all of your life and career on only one income source going forward. Once you develop a dependency on a single income source, it’s very difficult to walk away from it. You may end up embracing traditional life goals you didn’t want to commit to, just because you can’t see any other more profitable options.

The best thing you can do to stay flexible financially for an uncertain future is to start building a life outside of a traditional career path. Develop hobbies, expertise, skills, and networks that may eventually translate into other income sources, so you don’t feel like you are stuck on a life path that isn’t what you want. You may still eventually decide what your current goals are the best for you and your family, but at least you will have broadened your vision to see what is possible. If you have a stay at home spouse in the family, it’s all the more important to make sure he/she continues to stay current with his/her industry, profession, or income producing skills so it gives your family options to take a turn if it’s right for you.

In summary, you never know what life may bring and how you may change. Know what you want and be flexible. It’s the coexistence of both that makes life interesting! Your financial plan should reflect both.