Mapping Your Financial Future

We live in a world that likes to make models. We’re obsessed with economists modeling what inflation may be, how weather patterns will emerge, and we may use them in creating financial outlooks.

When you think about economists and weather reporters, do you have a gut feeling they are generally accurate, or not so much? (My take is not so much).

While models can be useful tools to view what might happen, financial planning seems to me to fit better in a context of map making.

We often get hung up on what’s the best move financially based on a few variables (and many variables such as tax and investment rates we all know will be unpredictable!), and don’t always make the same effort in understanding the practical reasons for financial choice.

I liken investment concepts frequently to working with a GPS device, and have come to realize that the GPS and map work well for discussing financial planning choices as well.

In making a financial map, there are a few items we want to take into account:

1. Milestones – what are life’s major markers along the way? These are items that represent a change, but are not necessarily a goal. Social Security payments start; children begin their careers, etc.

2. Destinations (goals) – we’re all familiar with goals, but map goal setting shouldn’t be too rigid. Goals must have dollar amounts and time horizons, and also a sort of ranking (it’s more important to retire, than to buy a vacation home); yet maintain a flexible approach (it’s more important to retire, but I’d work another few years for a less expensive vacation condo).

The beauty of the map is while you are bound to stray off course, but just like a GPS readjusts to get back on path, so too can regular meetings with your adviser. You may start out with a destination or goal in mind, and find you may want to change paths several times.

The goal is to keep some flexibility in your planning, and to think in practical terms as well as financial.

Below are a few planning encounters I’ve observed where a step back and looking at the big picture map conversation is beneficial:

• Roger made a budget last year, and is basing his 2012 spending on what he created. In January he spends more on food and car repairs and is concerned he is off on the wrong track in the New Year. When taking a look at the bigger picture, last year had relatively few car repairs. Just like a financial plan, a budget needs to see the big picture; he also will need to replace his paid for car in the next few years which means establishing a place in the budget for car replacement .

• Tom and Sara created a financial plan for the first time last year at Tom’s retirement. Based on assumptions in tax rates, inflation, investment returns, and expenses they conclude they are doing very well to meet their retirement goals. In fact, the data suggests they may be able to pull $50,000 out of their savings and purchase a recreational vehicle they’ve been dreaming about owning and using to visit family across the country. While the data may continue to support this purchase, perhaps it makes more sense for Tom and Sara to learn a little more about what owning this vehicle is like by renting one for a few cross-country trips, and seeing how their budget may change in retirement over the next year to two.

Models can be useful tools to visualize and discuss options, but it’s important to also take a step back and realize they’re all built on assumptions not necessarily likely to be true. Plan, have flexibility for life’s unknowns, and update your map on a regular basis.