Financial planning should aim for three goals.
It is a difficult task, but not impossible.
Start with simple.
The late Hungarian mathematician Paul Erdos (pronounced air-daish) was a once-in-a-very-long-time genius. He was well beyond prolific. He authored or co-authored nearly 1,500 significant papers. About one every two weeks for 60 years. He worked on math everywhere — from restaurant to lecture hall to classroom to train. He had no home but traveled about visiting friends and doing math.
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In respect to mathematical proofs, he had two thoughts:
- Great proofs use simple tools to reach their consequences.
- Great proofs give insight into why it is so.
Substitute financial plans for proofs and you will see the point. Financial planning can be complicated, obscure, and beyond the experience of many clients. Simple is a necessity or they will fail to follow through. Simple tools — or maybe tools that have been fully explained — are crucial. Arcane confuses. Insight into why it is so is the connection to the future, and it must be present or else everything that comes along will seem new and complicated.
The second layer is secure.
By this we mean predictable in the time frame required. Secure does not mean can’t lose — it means being involved with tools that tend to work.
Life insurance is an example of a simple tool that devours a complex problem. Some of the problems are short-term and large. Mortgages, money to raise children, student loans. Term insurance provides a low-priced option to cure the capital deficiency. In this case, the client should hope that the premium money is lost. No claim. Other longer-term problems require a different tool.
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Security of investment is problematic because inappropriate emotions enter the picture: fear, greed, impatience, and frustration, among them. In the long run, the stock market is more stable than the fixed income market and provides much higher returns.
Yet by focusing on one-year returns, people come to believe the opposite is true. For people with a 30- to 40-year investment range, paying attention to returns too frequently is deadly. It is like a superstar athlete. American Olympian Al Oerter once said that when an athlete reaches the peak of his ability, they should cut off his head because that is the part that will cause the quickest failure.
If you have a good plan, you can be patient.
Sufficiency is part of simple.
Do not risk “enough” for extra. That is liking trying to double your money by risking the rent money on a horse race. It is harder to see when, but the results can be as devastating.
The order is: Provide for risks and uncertainty, get out of debt, build a predictable future income, go for life-changing growth, acquire things just because you like them. If you only get part way, no great problem.
It is organized common sense. The meaning comes from simple tools that provide insight into the method.
Why settle for less than great financial plans?
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits, and investment agency in Peterborough, Ontario.
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