Avoid One-Size-Fits-All Financial Plans
My son, AJ, is at that age where wrestling with his daddy has become quite popular. Whether he comes barreling around the corner to tackle me in the middle of the room or jumps off the couch onto my back just to hear me yell. He loves it. Unfortunately, he likes to do the same to his one-year-old sister and she doesn’t find it nearly as much fun as I do. AJ is under the impression that wrestling is fun and great. His problem is in applying that idea to everyone. This doesn’t fit everyone he knows so he has to learn to understand where it applies and where it doesn’t.
Generic financial advice can be a great starting point. There are certain irrefutable truths like avoiding excess debt, having an emergency fund, and living within your means that apply to all. However, blanket suggestions like saving 15% of your income, investing more conservatively as you get older, and avoiding certain types of insurance at all costs isn’t terribly meaningful. This advice may be helpful in determining where to start your financial discussions but not necessarily where those conversations should finish. Consider the growing popularity of target date funds in retirement plans (21% of all defined contribution assets as of the end of 2013 and rising). These funds allow a participant to invest in an “appropriate” portfolio based only on his or her age. Essentially, one sets it and forgets it. However, since when is age the only determining factor in how we need to invest our money? Does a worker age 50 with $250,000 in a 401k need to be investing the same as another 50 year old with $10,000? Probably not.
Our personal finances are just that, personal-to us as individuals and families. How we go about handling our finances will probably be different than your friends, neighbors, and family. Money isn’t a one-size-fits-all baseball hat that fits everyone just right and that’s a good thing. Furthermore, the variables involved in those finances are constantly changing. Incomes change, markets go up and down, and tax policy is no more predictable than the weather. Throw in family events like marriage, birth, death, disability, or divorce and things get complicated quickly.
I’ve stressed the need for individual planning continuously, but in order to make it effective, some things need to be considered.
– Keep up with the details. Missteps can happen even when something as simple as age is incorrectly assumed.
– Investigate the assumptions. Your financial future can be radically changed by assuming an 8% return as opposed to 6%.
– Know the costs (and what you’re getting for it). Expenses you pay can also have a noticeable effect on your financial goals.
I asked a client why he didn’t make long-term financial commitments, even to the charities he was passionate about. He said, very simply, “Things change.” Good wisdom to remember and apply to your personal finances.