The secret of real-life financial planning (for humans)

Managing money is driven more by human emotion than by math and spreadsheets.

I love Tim Maurer’s quote – Personal finance is more personal than it is finance

Books would suggest personal financial planning is simple:

You find out what people want. You design a plan. You implement it.

In theory, yes.

In reality, we typically get stuck in the first step.

Find out what people want

Asking people what their financial goals are is pointless. To have a goal means being clear on my values. And it turns out, we’re pretty average at knowing what we really want.

Not because of lack of ‘inspiration’. We’re being told and shown what we ‘should want’ all the time. What success ‘should look like’. What we ‘should own’. Where we ‘should live’. How much we ‘should earn’. What sort of lifestyle we should aspire to. Listening to any of that only leads to anxiety and setting wrong expectations.

We’re not being taught how to find out what we want. We’re not being encouraged to follow our individual path. It’s almost the opposite.

From a very young age, we’re being taught how to fit in. What success looks like. What we should want next.

And just when we think we’ve figured it out, the goalposts move.

The bigger house. The better suburb. The promotion. The investment property. The holiday. The earlier retirement. More.

So, when a financial adviser sits across the table and asks, “What do you really want?”, it can be incredibly difficult question to answer. But what if finding out the answer will turn out the most valuable thing?

Then comes the easy part – designing a plan. Except, by default, our plan is full of assumptions. We assume what we want, how much we’ll earn. We assume investment returns, inflation. We assume what will happen along the way. We assume when we’ll retire and what we’ll spend. And perhaps the biggest assumption of all — we assume we know what to assume.

Then there’s the final step of the initial phase – putting the plan to work.

Do clients always implement everything immediately? Of course not.

And even if they do what happens tomorrow? Maybe we won’t feel like sticking to the plan anymore? Maybe it gets boring. Maybe it becomes repetitive. Maybe markets fall and suddenly the strategy that looked perfectly sensible on paper feels terrifying. Maybe we’ll hear about a ‘better way’.

Or maybe we simply won’t feel like doing it ‘this way’ anymore.

Human beings aren’t spreadsheets. Knowing what we should do and actually doing it are two very different things.

So how does one plan knowing all this?

We can start with being honest about the starting point. It might take a while before we get some idea of what we really want.

That’s okay. The adviser can facilitate these conversations. Listen. Ask questions and help explore the meanings, identity, emotions. It takes a while before uncomfortable silence turns into something constructive. Until rehearsed answers disappear. Before emotional, uncomfortable and sometimes raw honesty starts coming out.

It’s okay if, right now, we don’t completely know who we are and what we want. It’s work in progress. We are work in progress.

Getting the assumptions wrong doesn’t make the initial plan pointless. It just means we need to understand what a financial plan actually is – a sense of direction, based on information available to us today. It’s not a prediction of the future.

The right conversations will reveal more details as we go. Getting the perspective right in this initial stage sets the planning tone. It allows us to relax knowing what we can and can’t control. It allows us not to obsess about the projected outcomes. It can provide important realisations and clarity we’ve achieved thinking about them.

In the meantime, time is working in our favour – we can establish plans that provide us with options — and hopefully the funding for whatever we eventually decide to do.

That, to me, is much closer to what real financial planning looks like.

A good adviser knows the original plan will probably be out of date soon after finishing it.

That’s why they stick around.

As new information becomes available, they adjust the direction. As circumstances change, they help us interpret what those changes actually mean. When emotions interfere, they provide an objective perspective.

They guide us through an ever-changing landscape.

And gee, that’s valuable.

Many people at the top of their careers have advisers, mentors and coaches. Interestingly, some coaches consistently produce better results than others.

Not necessarily because they’re technically more knowledgeable. Sometimes they simply know how to engage their client better. How to challenge them. How to listen. How to motivate them. How to recognise when to push and when to say nothing. How to find the balance between an empathetic hug and a ‘punch in the face’.

How about that for a quality to seek when choosing an adviser?

Michael is a senior investment planner at Sydney Financial Planning, with over 20 years of expertise in retirement planning and planning post-divorce. Michal works with people who seek simple and elegant lifestyle with a purpose, while minimising tax, fear, and anxiety about financial decisions. He specialises in behavioural investment counselling, advising high income earners and high net worth families to invest through all the cycles of the economy.