Planning For Uncertainty

For many of my clients – as well as for me – uncertainty is one of the most frustrating pieces of the current economic and financial environment. Planning for retirement and other goals has become just that much more difficult. In some respects, it seems that a little bit of the bedrock of our financial foundation has been eroded. A little insight about the future sure would be welcome.

Truth is, we can’t know the future. With the exception of certain undeniable forecasts, like the one about death and taxes, I cannot tell you what will happen later today, let alone what the future holds. No one can. Yet, to some degree, we long for at least a little sense of certainty to help us make plans. That may be why it’s so easy to make assumptions about the future based on the past. We really want the past to be prologue, even when we know it most likely will not be. Frustrating!

So what can we do with this frustration? We can plan for the future. Wait a minute, isn’t that contradictory? Not really. The planning we do is based on what we know about life, and especially, what we know about the financial world in which we live.

I have been reading a marvelous book by Doug Lennick, CFP®, titled Financial Intelligence(2010, FPA Press, Denver). The sub-title is How to Make Smart, Values-Based Decisions with Your Money and Your Life. In Chapter 3, Doug provides guidance to help plan for uncertainty. He sets up two categories: What can’t you know, and what can you do about what you can’t know? Let me summarize Doug’s thoughts.

What Can’t You Know?

• You can’t know when your life or that of a family member will be significantly changed.

• You can’t know what’s going to happen with the overall economy.

• You can’t know what’s going to happen in the real estate market.

• You can’t know what’s going to happen to the stock market.

• You can’t know when your employment will be disrupted.

What Can You do About What You Can’t Know

In this section Doug introduces his Smart Money Philosophy. He encourages us to embrace the truth of uncertainty as a motivator for creating financial security and independence. In the Smart Money Philosophy, your plan helps you prepare for life, through all its mountains and valleys.

Here are three key financial points:

• Recognize that you must save money.

• Put your investments in a variety of financial instruments.

• Use insurance to transfer some of the risks of uncertainty to someone else.

So how can you go about making your own Smart Money Plan? First, figure out how much money you really need. What lifestyle do you want? What are your goals and dreams? What can you live without, and what would really hurt if it was missing? This is a good time to revisit your life goals and make sure they still are your life goals.

Recognize that life will have difficult times as well as good times…and plan for both. Planning for the good times seems easy. The economy is strong, the financial markets are in full bull mode. You are healthy and life is good.

Planning for difficult times is, well, difficult. However, doing so is even more important than planning for the good times. As part of this process, consider death – both the financial and personal implications. At the least, make sure your family will have the financial footing to be able to keep going.

Think about what might happen while you are alive, but maybe not as healthy as you want. It’s one thing if you are unhealthy, but can still work. However, this is not always the case. Think through what might happen if you were no longer able to work. While you are at it, what would happen if you are unhealthy enough to not be able to care for yourself? Considering these things will go a long way towards helping you and your family weather the difficulties life may present.

This brief review barely scratches the surface of the good stuff in Financial Intelligence. I recommend getting the book and reading it by yourself and with those you love. In the meantime, think through the recommendations about planning for uncertainty, and take steps to begin your own Smart Money Plan.