The “Perfect” Financial Plan
In his 2005 commencement address to the graduating class of Stanford, Steve Jobs shared many powerful messages, but one that stuck out was his discussion of “connecting the dots.” Although Jobs wasn’t talking about financial planning, the message is relevant to this topic. In his words:
“You can’t connect the dots looking forward; you can only connect them looking backwards. So, you have to trust that the dots will somehow connect in your future. You have to trust in something – your gut, destiny, life, karma, whatever. Because believing that the dots will connect down the road will give you the confidence to follow your heart even when it leads you off the well-worn path; and that will make all the difference.”
Often, in the process of financial planning, years go by before the impact of your earlier decisions is noticed. These decisions can’t be truly appreciated until a later point when you can look back and see the cumulative effect of how all the “dots” connected.
Many people fail to plan for their future because they don’t know what it will look like. Jobs’ point was that the best you can do is to take the right next step based on the information you have today, and trust that by doing that year after year you will end up in a place you want to be. If you follow the same logic when managing your finances, you’ll be able to make a better financial plan.
The Perfect Plan
1. Realize there is no perfect financial plan.
There are too many unknown variables that are outside of your control. No one can tell you what the market will do tomorrow, how tax rates will evolve in the future, or even if you will be around to see either. Furthermore, it’s impossible to look out over 20, 30, or 40+ years and know exactly how your life will play out or what you will want to be doing at some arbitrary future date.
2. Since there is no perfect plan, the next best option is to create the best plan you can, based on what you know today.
Think of the beginning of the financial planning process like taking a road trip from Michigan to Florida. One approach would be to just drive south. Alternatively, you could map out your route, use a navigation system to guide you, and have a defined itinerary to follow for the trip. You’ll likely have to make adjustments along the way for uncontrollable variables like traffic, weather, or accidents, but having a plan for where you are ultimately headed will make those adjustments easier.
You may end up making it to Florida using either approach, but the most efficient route, with the fewest headaches, is the one that involves a plan. The same concept applies to financial planning. Having a plan allows you to make better-informed, more intentional adjustments over time as conditions inevitably change. Said differently, don’t let the lack of visibility for how things will play out over time prevent you from putting together a plan for where you want to go.
The “Next Best” Plan
Knowing there is no perfect plan, you can go about creating the best plan based on what you know and feel today. The key thing to remember is that in the future, even a year from now, your situation will be different, and you will have to adjust your plan. In certain years, the adjustments will be small, while in other years, they will be large. Financial planning is a dynamic process that requires you to constantly gather and incorporate new information as you receive it. As you create and refine your plan, focus on what you can control, while letting go of (but still being mindful of) the things you can’t control. While easier said than done, this brings peace of mind to the process.
Some Examples:
Total Control:
– Saving
– Lifestyle
– Investment Behavior
– Insurance Coverage
Some Control:
– Employment Situation
– Health
No Control:
– Stock and Bond Market Returns
– Tax Rates
Conclusion
As humans, we enjoy feeling in control and we dislike uncertainty. This tendency carries over to all areas of our lives, including our finances. While we would all like to have a perfect plan, exact timing of when to get in or out of the stock market, or a realization that now is the ideal time to do x, y, z, it doesn’t work that way. A better, more realistic, approach is to begin with your best guess of where you would like to be in the future and work backwards to understand what is required to get there. Then, focus on what you can control, making adjustments along the way based on how the variables that are out of your control evolve. While it’s not the perfect financial plan, it’s the next best plan – the one that eventually will allow you to look back and appreciate how the dots have connected.
About MD Wealth Management: We are an Ann Arbor financial planner that specializes in providing financial planning for physicians and retirees. We are CERTIFIED FINANCIAL PLANNER™ professionals and fiduciary financial advisors who operate on a fee-only basis, which means we do not sell financial products or collect commissions. As an Ann Arbor financial advisor, we enjoy working with clients both locally and remotely.