Oct 23, 2013 / 5:00 am
“It’s clearly a budget. It’s got a lot of numbers in it.”
-George W. Bush
“I have a financial plan” - famous last words. All too often, it’s a document that was put together by an ‘advisor,’ who took just enough time to gather the minimum amount of data required to populate a software program. In turn, the program spit out 40 pages of hieroglyphics, charts and jargon-heavy comments that use best-guess rates of return, inflation numbers and expenses. You’re then assured you will be in great financial shape twenty years from now. You will probably make a series of decisions next, which are meant to put you squarely on the path to the perfect retirement. Unfortunately, like all things based on a series of forecasts, a lot needs to happen according to plan to make it all work out; the further down the road you look, the harder it is to be sure. Just ask a weatherman.
I accept a certain amount of forecasting is necessary to think about the future. Where I take exception, is when it becomes the primary focus. Long before we talk about how much and what if, we need to have a different conversation with ourselves or our advisors. This conversation doesn’t begin with a financial planning questionnaire or a pop quiz; it begins with a frank, sincere discussion around the things that really matter to you. In Dan Sullivan’s book, The Dan Sullivan Question, he outlines a framework for this conversation. He talks about three simple questions you need to answer if you want reality to play a role in your financial plan.
1. If you were looking back three to five years from now, what has to have happened in your life, both personally and professionally, for you to feel good about your progress?
This is about the things that mean the most to you: career changes, retirement decisions, health choices, educational matters, relationships, lifestyle choices, family matters. Your future is not a collection of numbers; it’s a series of events and experiences that collectively become your life. You need to identify the things you really want to see happen, then you need to build a roadmap to get you there. How do you know if you can afford your future if you’ve never really thought about what the future looks like? Start with a list that includes everything you can think of, and then cut down until you get to five or so of the most important to you.
Once you’re clear on the things you want most, you now need to ask yourself two more questions.
2. What challenges or dangers exist right now that you need to eliminate or overcome in order for you to get the things you want?
This is where you identify the potential problems or challenges that you might have to face; stick to the realistic ones - not all the potential ones in the universe. Is your job secure? How is your health? Is there a chance the kids might move back home? Could a parent need to move in with you? What if interest rates rise or you need access capital for an emergency? Is your business growing? Is the real estate market rising or falling? Be honest and be specific.
3. What opportunities and strengths do you have that need to be captured?
Can you use your life’s experience to consult as a means of generating additional income? Are you a writer, is there a book waiting to be published or written? Do you have a talent that’s been a passion, but not something you thought you could rely on for steady income? Would you move somewhere else, another city or country that has a lower cost of living? Can you afford to stay in your house and hire care, rather than sell it and move into an independent living facility? Is there an inheritance, a business or piece of real estate to sell? Focus on the things that are possible and that you’re able to control.
The purpose of the planning process isn’t to give you a false sense of security, it’s to identify the things you really want in your life, to understand the roadblocks that you need to break-through, and to identify the advantages you already have in your grasp. Once you’ve done this, you can go back to the numbers and put a realistic cover on those 40 pages.
This is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member CIPF.
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