Who doesn’t like surprises? But won’t we like them more if they are pleasant ones! What about the unpleasant ones? Our wish would be to know of them in advance and have them changed into pleasant ones. It is the fear of unknown, unpleasant events and results that makes us worried. That is why we plan…we plan ahead to think of what-if scenarios and hope to take care of unpredictable ones from our lives. Our need for planning is evident in all facets of our life. Each day we get up in the morning with thoughts full of planning our day like when to start work, how to travel, where to eat or who to meet. On a larger scale we plan our prospects for college, projects at work, holiday tours or family life.
While planning our life activities, whatever or whenever we are planning, from buying toys in childhood to pursuing our interests after retirement, we are not able to get away from planning ‘Money or Financial’ side of these aspects. When we plan where to eat, we can’t avoid thinking how much will it cost? When we say which route to travel, aren’t we thinking about how much can we save by doing so? Going to a good college increases our prospects to earn good money and successful completion of projects at work ensures handsome bonus! Money is an integral part of our life planning. Through various activities we are either planning to save money, to earn more money, to get value for money or to avoid loss of money. Apparently ‘Life planning’ and ‘Financial Planning’ become synonymous in our lives!
Seemingly ‘planning’ or ‘financial planning’ should be easy, as we know our streams of income, streams of expenditure, rate of savings, capacity to build assets and extent of taking risks. We are aware of insuring ourselves against any odds in life and safeguarding our future with sound investments. Hence the process of planning should be uncomplicated and straightforward. And as a result all of us should be living a predictable, confident and stress-free life and which is why we plan. But are we able to plan? Isn’t it astonishing to see that only few of us will be able to say ‘Yes’ to this question!
Why? Are the results mostly unexpected which makes the whole process of planning unreliable? Are we not able to influence the outcomes as we thought and planning seems unnecessary and useless?
If this is so then ‘should we plan’?
The Process of Planning
Situations---Our Understanding of the situation---Our reaction to the situation---Outcome
Next three points may help us understand some aspects of planning process. Our understanding of these aspects will be our guide to finding answer.
1. The Random events: (Unusual situations)
Planning refines our decision making and takes away randomness from our lives. It forces us to retrospect various forthcoming situations and define our reactions to them. As a result we feel more confident of the outcome. But as the saying goes ‘Man proposes, God disposes’…a lot of time situations and events are unpredictable and sometimes even incomprehensible. These are the ‘Random Events’ in life. Random events are the rare events whose affect on our lives can be compelling and are to be taken seriously.
There are rare and unpredictable events like Tsunami and Sandy, 26/11 firing in Mumbai or 9/11 in New York that can shake our confidence in being able to live a long life. And there are less than rare events like accidents and illness which cannot be predicted. If we are fortunate to be safe and sound our life planning or financial planning can be severely affected by the booms and dooms of economy.
Who could have predicted dotcom bust of 2001 where several people lost their jobs? Who could have foreseen downturn of 2008 where several people lost their hard earned savings? Or who could have known that subprime was lurking around the corner when several people lost their homes to debt? Within one decade a lot of people not only lose their jobs, savings and homes, they also lost faith in the system! No amount of future predictions could have paid their bills, college fees and loan EMIs. As an individual /family who were busy earning their living most of us were unaware of the changing economic conditions, we trusted the complex scientific analysis and advice given by experts and based our future planning on these forecast. But some ‘random’ events threw whole planning out of gear leaving us with a question ‘is it possible to plan’?
2. The Mental blocks: (Biases against our understanding of situations)
Planning proposes the optimum solutions to any situation through an objective analysis and understanding of various related paradigms. The whole concept of planning process expects us to perceive and interpret all information rationally without inhibitions. But in reality we are influenced by the biases. These biases are ‘mental blocks’. Mental blocks are our feelings, motives, knowledge, experiences, social and emotional influences which prevent us from unprejudiced understating of any situation.
Young adults who are just starting career or a family are less likely to worry themselves about retirement planning or college fees for their kids than middle aged adults. Their new found financial independence and peer influence encourages them to spend and enjoy rather than save. Such feelings are type of mental block which prevents them to see beyond current life. The needs which are 25-30 years ahead seem to be too far to them. However in reality there are only 30 years available to earn, to save and to invest for entire the lifetime of 55-60 years starting from young adulthood. Not to forget that the earnings of these 30 years are to be used for current expenditure, lifestyle enhancement, vacations, future responsibilities, emergencies and illness along with preparing for the 25-30 nonearning years. Unfortunately even the magic of compounding interest cannot make up for small rate of savings!
Likewise we need to keep asking ourselves if we are getting trapped in the emotional spiral of worrying too much about future. This emotional spiral is a mental block which does not let us enjoy our present. Sacrificing all our present pleasures and keep worrying about our retirement plan is not wise. Who knows if we will be alive and kicking to see that day? We know that random events do happen! Activities like going on vacations with our children are more relevant when they are young and need our time rather than when they are grown-ups and are capable to have their own holiday plans. Now the question arises that how can we overcome mental blocks and plan?
3. The Impulsive decision: (Hindering our rational reactions to situations)
Planning helps us in taking rational decisions. While planning is a process, decision making is a momentary task. It is the moment when we decide to act or not to act. However contrary to the rationale of planning the very moment of deciding may not always be thorough and vigilant. The aberrations are ‘Impulsive decisions’. These impulsive decisions prohibit the best possible outcome to favour us.
Unplanned purchases through credit cards are classic example of impulsive decisions. Each time we use credit cards for discretionary purchases we get closer to debt trap. We are fully caught into the web of paying high interest on this credit when we start rolling the debt instead of paying it off. As a rational human being all of us know that being in debt is not a happy situation but the urge and satisfaction of fulfilling our dreams force us to take this step. The interest rate seems to be a small cost to pay for what is seemingly unaffordable for us. Who would like to wait when dreams are just a card away!
Should we plan?
Should we plan? Above points are good enough reasons to think otherwise. After all why we should waste our time and energy on planning when we have no control over situations, when we are unable to objectively analyze them and when we take emotional decisions as opposed to rational ones. And that’s exactly where lies answer!
Since there are random events in life we want to think of what-if scenarios and plan for them. Also as humans, we tend to get emotional and unreasonable at times. Objectivity and rationality in planning process keeps reminding us of unfavorable results of being emotional. In addition to that planning keeps us disciplined so that we do not take impulsive decisions. We may not be able to plan everything but with regular situation analysis, monitoring and discipline we can get desirable results to large extent.
We cannot fight what is truly unknown. We cannot know future but through planning we can keep ourselves ready for any hardships. So, of course we should plan and since life minus money is almost impossible to think of, we should acknowledge financial planning as part of our lives.
Happy Financial Planning!