There are only two things that we can know with absolute certainty in the world of finance – your current financial position, and that your life will change. That’s it. Anyone who tries to tell you any different is lying. Despite your best efforts, you can’t predict, or even “plan,” for an unknown future. All you can do is take what you know, and use it to your advantage.
The Problem With Planning
Traditional planning is based on the premise that your life, your future, is linear. It then uses stagnant inputs and assumptions about tomorrow, to try and formulate a bullet-proof plan for success.
Here’s the bad news – your life isn’t linear. It’s not stagnant. If you plotted your life up until this point on a graph, it more than likely won’t yield a beautifully straight line. That’s because stuff happens, and when it does, it can cause your life to swing one way or the other. Your life is always in motion – it evolves through time. It’s dynamic, and therefore can’t be addressed by a static plan.
A static plan has little wiggle room when your life “chart” experiences fluctuations. But, your life will swing, I can promise you that. It won’t always be linear.
That’s precisely why traditional planning is flawed.
Life Events That Can Change Your Financial Situation
Here’s a quick-list of those big milestones that can cause your life to fluctuate:
2. Having a child.
3. Changing jobs.
4. Job loss.
6. Death of a spouse.
These events have different implications – some of them positive, some of them negative. Unfortunately, the negative ones can hit you out of nowhere. It’s usually not until this happens that you realize just how vulnerable your life’s work was. At this point, there’s typically little you can do about it other than stomach the blows.
On the other hand, you want to be able to take advantage of opportunities when they present themselves. These include things that can advance your life or make it more complete, like a new and better job, getting married, having children, or starting your own business.
To do both, to mitigate the financial heartache from the negative swings and capitalize on the good from the positive swings, you have to be optimally positioned to effectively react to your life as it evolves.
7 Principles That Will Protect Your Finances From “Life”
So, how do you do that? How do ensure that you can handle “life” when it happens to you? You adhere to these seven principles:
1. Practice financial positioning. This is the overarching principle to apply to your financial life. The others are gravy on top – but still extremely important. If planning is broken, you need something else. Financial positioning focuses on optimizing your current financial position. It manages your changing information as your life evolves, stress testing your current strategies against it. You can then keep yourself positioned to effectively react and adapt to life’s curve balls – whether positive or negative. The result? An increased ability to live the life you want.
2. Be engaged. You should regularly review your financial strategies, and be instrumental in implementing them. Make sure you understand what is being done on your behalf, and that you know what you have and where it is.
3. Align your financial strategies/behaviors with your most important values. Values should play the same role in your financial life that they play in your daily life – they should guide your decisions making. This keeps what is most important to you at the heart of your financial strategy.
4. Define your “why” behind money. What’s your reason for working, investing, doing everything you do? What does money mean to you? What does it enable you to do? Until you define this, you have nothing to fight for. Your “why” will guide your decision making, and help you live intentionally with your money.
5. Protect your life’s work. Your life’s work means nothing if it’s not protected from everything that can destroy it. You must protect yourself for your full economic value – this includes material assets like your home, and your most important asset, you.
6. Save at least 15% of your income. If you can’t save your money, everything else in your financial life will have to work harder to pick up the slack. Maintaining core liquidity is key to reaching your full financial potential.
7. Create an investment policy statement. This document puts your investment philosophy and strategy on paper. Essentially, it helps you understand where your money is, what it’s doing, and why it’s where it is and doing what it’s doing. Every time markets rattle you, pull out your IPS and remind yourself why it’s important to stay disciplined. If an investment doesn’t meet the criteria stipulated here, you shouldn’t invest in it.
Why Does it Matter to You?
Being able to effectively prepare for and respond to “life” is of the utmost importance.
Your success isn’t dependent on how much money you have. You can have all the money in the world, but it doesn’t mean anything if it can be wiped out should your life change. Rather, your success is dependent on your ability to effectively react to life as it happens around you – on whether your strategies can adapt to your current financial position as it continues to evolve.
Which brings us back to financial positioning – the principle that encompasses all the others. This method takes a comprehensive view of your financial life, from your assets and liabilities, to your protection and cash flow. Once you have that real-time picture of your current financial position, you optimize it based on new information, as your life evolves. This is the approach we take with our clients.
Life is messy and unpredictable. You can’t plan for a future you know nothing about. Therefore, you need a dynamic method for reaching your full financial potential that uses these facts to your advantage.