The tools of financial planning
Financial planning is a daunting task because it’s BIG and IMPORTANT. In yesterday’s post on Retire Happy Blog, I used a map as a metaphor for financial planning. The analogy I used is that the financial plan is a map. Just like a map, a financial plan gives direction and helps people to stay on track towards a destination. Here’s the picture I used in the article,
On a map, there are many places to stop. You may stop somewhere to relax before you move on. You may stop to look around and that might lead you onto a different road and maybe even a different destination.
Life and financial planning work much the same way. Along the journey to financial freedom, you can take your time and enjoy the moments today. Just know that every stop might slow you down and lead you to your destination a little later than you thought. Some people on the other hand are really driven and prefer to get to their destination as quick a possible so they stop only when absolutely necessary.
What happens when we don’t have the map?
When we don’t have the map, we tend to live life for today only because we do not have a view of the future. It’s so easy to live life in the now because life has become so busy. In fact we are often so busy that we forget to plan and look ahead. Planning is simply looking in the future to make the future as predictable as you can.
Studies suggest that more people do not have financial plans than people that do. Lots of people are going through life without the proper tools and no map. Despite that, some will still get to their destination but it makes me think of the saying “Every road takes you somewhere, but is that somewhere where you want to go?” Too many people are living their lives by chance, not by choice and while some argue that’s more fun, I see a lot of people in their 50’s now realizing they were on the wrong road or they stopped to have too fun too many times or they never had a map to keep them on track.
Has the compass replaced the map?
Thanks to @PaulCockshutt (via twitter) for posing this really good question to me and suggesting that I read a commentary by the great Seth Godin on the compass and the map.
In this post, Seth suggests that a compass is more important than having a map simply because the map changes so much. Seth says “The map keeps getting redrawn, because it’s cheaper than ever to go offroad, to develop and innovate and remake what we thought was going to be next. Technology keeps changing the routes we take to get our projects from here to there. It doesn’t pay to memorize the route, because it’s going to change soon.”
I understand what Seth is saying here but a compass with no map is useless. I’ve gone many places and I’m not always great at knowing North, East, South and West. If I need to get around in a place I am unfamiliar with, I default to a map. In fact, I use new technology – Google Maps – to help me out. If you think about it, the map has not lost it’s usefulness. Technology may have changed how we use maps. Maybe it’s not an “either-or”. Maybe it’s better to have a map and a compass. Maybe technology has made the compass obsolete too? Who uses compasses anymore? Maybe the new compass is a GPS. Maybe the GPS is not a compass but a more powerful map.
I still think the map is a powerful tool, not only to physically get from place to destination but also for finances and life. I would suggest that everyone needs a financial plan and as a result, everyone needs a road map. Because a plan is dynamic, not static, your financial plan needs to be revisited from time to time. You need to make sure you are on the right path and that the road ahead has not changed. There are many tools to make financial planning easier but the map remains the most important tool.