Recently I encountered a situation that allowed me to discover a new approach to financial planning.
Normally, clients come to me with some existing “goals.” They might not know clearly about the amount, the timing, or the importance of these goals, but they have them. They have answers for a question like this,
“What would you like your money / assets to help you accomplish?”
The answers may range from quitting my job, buying a yacht, to sending children to college or funding a ranch for their horses. It can be anything they want or need in their lives.
For the first time, a client came to me with no answer to this question. In other words, there were no goals to plan for.
Unfortunately, I cannot further describe how we worked through this problem together as it’ll likely be deemed as “publishing a testimony”, which is not allowed in our line of work.
I will, however, describe how this experience shifted my thinking.
Goal-based Financial Planning
For many people, goal-based financial planning is very powerful. It gives a purpose to every dollar that they save or invest. Before viewing their finances that way, they may worry more about not making comparable return as their neighbors or whether they are saving / investing enough. Goal-based financial planning helps set up a framework and strategy so that it’s clear how they are going to prepare for those important milestones in life.
What’s insufficient about goal-based financial planning is that it requires people to come up with numbers. When do you want to retire? How much do you want to spend in retirement? How long will you likely live? Whatever questions financial planners ask, they are trying to put a number in the projection, so they can do the job – help people make financial decisions based on calculations, not just pull it out of their hats.
Except that we are putting numbers on a life not yet lived.
To be fair, it is a helpful process to try to imagine our life and go through some scenarios. Sometimes we need that kind of push to truly evaluate whether we are still on the right path. However, I’m beginning to think that there may be a better way to do financial planning.
Preference-first Financial Planning
If I’d been honest with myself, I would have figured out that I am a bit like this client I mentioned. I don’t truly have financial goals to plan for.
I don’t have children. I don’t want to own a house now. I am financially secure. I am doing my dream work.
Of course, I have ongoing financial decisions to make like everyone else, but they rarely fit in the mold of a particular financial goal.
That’s kind of ironic. As financial planner, do I not need financial planning?
The more I think about it, the more I have a new perspective on how I view financial planning. I’ve always told people that financial planning is a process that helps them make financial decisions. If people don’t think about their lives as a composition of milestones and goals, why should we force them into that box?
How else do people think about their financial decisions, you ask?
I’m sure you agree. Preferences dictate our food choices, what movies we go to, and what exercise routine we develop. Those are all decisions with financial consequences, albeit smaller in scale.
What role do preferences play in our bigger financial decisions? Like what to invest in, and what career path we choose?
In modern life, financial decisions are often represented as something that need to be optimized. We always want to know the best way to save, the best way to invest, the best way to retire by the time you are 40.
Perhaps we are mistaken all along. There is no best way. We should acknowledge more how preferences shape our financial decisions and allow them into our financial planning process.
For example, one of my preferences, or decision criteria, is simplicity. It came about from my experience of moving to a new country every 1-2 years. I do not want to make a financial decision that would further complicate our lives at the worst possible moment. This is one reason why I do not want to own a real estate property, even if it might give me higher return than the market.
Some of my clients have a strongly stated belief of being personally responsible for climate change. They will not invest in any companies in the fossil fuel industry, even if it means their portfolio is “less efficient” compared to an index that does not exclude that entire industry.
For others, flexibility may trump all considerations. Even though they know they likely will never touch the chunk of cash in the bank, they don’t feel comfortable not having immediate access to it. Some may call it irrational, or inefficient use of resources; for them, it’s insurance.
After reviewing your preferences, you might even be able to develop something like this:
Preference First, Heart First
What if before you start thinking about optimizing financial choices in terms of dollars, you think about what values are important to you, how you would like to feel, and the relationships you want to make thrive?
I think we all do that. We just don’t acknowledge that our hearts have greater control of our financial decisions over our brain. And when we do acknowledge it, we somehow think that we are worse off because of it.
Instead of ignoring our preferences because they could be financially inefficient, we should first examine how we developed those preferences. Are they truly bad, or do they serve a purpose? What if we incorporate those preferences into our decision process? Will that lead to worse financial decisions, or will it actually make us stick to good decisions, because we know our hearts are in it?
You may even realize through this process that some of your preferences are not the best for you. You simply developed them from past life experience, and you may develop a new preference to replace the old one.
For those who are on the journey of adulting, I hope a preference-first financial planning approach is how you will think about your financial decisions. Don’t feel pressured into creating lofty goals or getting what everybody wants. The life goals may or may not appear, but you’ll know that you make every financial decision according to what makes you who you are.