Your Money In The Balance: Financial ‘Knowns’ vs. Assumptions

The only way to deal with the future is to put yourself in a space where you are dealing effectively now.

Life is a continuous succession of now, now, now.  Dealing effectively in the ‘now’ can accrue positive consequences for our future self. 

How does this observation apply to financial planning? Part of the financial planning process involves simulating or projecting our financial circumstances out 20, 30 or 40 years into the future. The calculations are based upon two sets of inputs: the ‘here and now’ knowns, and our ‘what might be’ assumptions about the future.

Example ‘here and now’ knowns:

• Earned income
• Tax bracket
• Retirement fund value
• Savings rate
• Spending behavior
• Amount of debt

Example ‘what might be’ assumptions:

• Future living expenses
• Future healthcare costs
• Future returns for stocks and bonds
• Future inflation and tax rates
• Our date of death.

Why is the distinction between the two lists important?  Well, the ‘here and now’ list can be apprehended and dealt with. The ‘what will be’ list is reasoned guesswork that can only be prepared for. The only way to deal with the future is to put yourself in a space where you are dealing effectively now.

What you can deal with effectively now:

• Develop a budget with an emphasis on managing your debt. Identify your essential expenses e.g., mortgage or rent payment, car loans or lease payments, property and car insurance, utilities, health insurance, etc. Carrying excessive debt forward will have a negative impact on your future net income.
• Evaluate and control your discretionary spending. Discretionary spending is too often rationalized as necessary, ‘must-have’ or ‘must-do’ spending. Is that $5 cup of coffee every day of the week a ‘must have’? Rediscover the smell of fresh-brewed coffee at home and save the tricked-out java from your favorite coffee shop for a special, earned treat. Have the same conversation with yourself about your cable service package, cell phone plan, beauty treatments, memberships, entertainment budget, etc.
• Save aggressively rather than invest aggressively. Consistently positive and moderate rates of returns are a more effective way of building your net worth over the long term than aggressive, ‘swing-for-the-fences’ tactics.
• Periodically evaluate your investments. Know what you own, why you own it, how it’s doing and compared to what. (If you’re wondering, “compared to what ‘what?’” don’t worry, a future blog post will discuss this in detail.)
• Be aware and informed on geopolitical events, macroeconomic developments, domestic politics and legislation, market and interest rate trends. Gather your news and information from diverse sources, including those with whom you disagree!

Tune in next week for more great Your Money In The Balance insights.

Additional information may be obtained by emailing The Careful Capitalist at investoreducationinfo@gmail.com.