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The Power of Awareness

It's been more than a few times that I've written about the single greatest tool in working toward long-term financial success....controlling what you can control. 

As we all have likely noticed, we don't get to control how much snow falls from the sky, but we do get within reason, the opportunity to decide where we live. If you can't stand winter and you're living in Buffalo there's a fundamental disconnect. True, work may tie us to where we live so that's maybe not the best analogy.  How about this one....

You don't get to pick the direction of the stock market but you do get to decide how much you spend and save/invest.

Many times during my term as U.S. President and Chairman of the Financial Planning Association, I was asked about the "luxury" of dealing with high net worth Clients. My comment was almost always the same; "the only difference between high net worth Clients and my "typical" Client was that the high net worth folks had more zero's after their numbers but roughly all the same problems. As it turns out, the net worth of folks who don't have to worry about either their spending or saving is a strata that few of us will ever attain. It's about as unlikely as it is that your child will be an NBA, NFL, NHL or MLB star.  And trust me, those are pretty daunting odds.

As Wade Slome, CFA, CFP® recounted in a recent Wall Street/CheatSheet article......

"First, figure out when you and your spouse will be laid off or be too sick to work. Second, figure out when you will die. Third, understand that you need to save 7% of every dollar you earn. (30% of every dollar if you're 55 now). Fourth, earn at least 3% above inflation on your investments every year. (Easy, just find the best funds for the best price and have them optimally allocated.) Fifth, do not withdraw any funds when you lose your job, have a health problem, get divorced buy a house or send a kid to college. Sixth, time your retirement so that the last cent is spend on the day you die...."

(The above is taken from a New York Times 2012 article)

Ok, sounds easy enough. 

Or; we could just control what we can control, namely spending and savings. 

How many times I've been told by Clients, both potential and existing, that "I don't want to live on a budget..." is many more times than I'd like to mention. Of course, controlling what you spend doesn't necessarily mean "living on budget" any more than being aware of the fact that high cholesterol will kill you keeps any of us from enjoying fatty food.  What we do however, is to have an embedded understanding that there's only so much of "this" or so much of "that" you can do without there being consequences.  Spending and saving are the same.  You don't have to strap down every line item to a finite dollar amount, never to be under or over spent on ever under any circumstances without the penalty of death. No, it's more like your next rib-eye steak or Wendy's Bacon enjoy it for what it is, aware of the looming consequences for repeated over indulgence combined with the mitigating and complicating efforts of a host of other factors. 

We gravely under estimate the power of awareness in our lives. 

Sound cash flow planning pays off in awareness more than it does that you favor one line item of spending more than another; or that you favor your retirement savings over your personal savings. While exact preferences can have some minor complicating factors, those factors pale in comparison to the consequences of no awareness. I'd much rather have to figure out which "bucket" we're going to take money from to maintain a robust retirement lifestyle than figure out how the heck we're ever going to be able to fund a retirement at all. 

So, my advice would be this....don't think "rules" when you can think "awareness." 

Controlling what you can control could be re-worded I think into- "be aware of what you need to be aware of.."

One thing remains the same, whether we're discussing "budgeting" or "awareness." 

It takes a few things to accomplish either; 

  • Some degree of thoughtful work 
  • A desire to allow awareness to happen
  • An appreciation for adjustments, mis-steps and course corrections
  • A metric for keeping score
  • An appreciation for the "up-ness" and "down-ness" of things

I read a recent article on the value of focusing on your processes instead of your "goals." The point of the article was that if you focused on your process, your goals would come and with much less stress and pressure. The analogy in the article was that if you tweaked your back in your gym workout and your goal was 10 machines, 15 reps per machine, four times a week, you might be tempted to press on if your "slipped disk" happened early enough in the day because you have a goal to keep. But realizing instead that you have a process, you just skip that day's back related exercises knowing that there's always the next work out and the one after that. If you focus on your process as "four workouts per week consistently and I'll be in much better shape" it's a bit easier to see how over the long term, you're likely to get to the same place, without as much stress and worry. 

Build a process for controlling what you can control (aka should be have higher awareness of) and focus on that rather than every detail and appreciate that over time, you're going to get it right much more than you get it wrong.

That's why they say that the plan is nothing...but planning is everything. 

It's all about awareness. 



Shaken Not Stirred: The Math of Financial Success

The mathematics of personal finance are not only hard to get your head around, their damn near scary when

You probably spent more time planning this year's vacation than you have your finances. 

You probably spent more time planning this year's vacation than you have your finances. 

The mathematics of personal finance are not only hard to get your head around, their damn near scary when you're faced with the conundrum of which set of factors to consider. 

I'm not going to attempt to write a treatise on the nuances of Monte Carlo simulation or security coefficients, I'm going to keep this blog post short and to the point. 

The conversation has begun anew in the circles of academia and personal financial professional journals that confirms what we've known all along: what you spend likely has more to do with your success than you think. 

Tied inexorably to that last statement is the other focus of a lot of press, the return projections for the markets are a full 3% under historical norms taken by most standards, including and perhaps most importantly, those of individual investors. 

So there you have it. Put these two comments into a shaker, give it a go and when you pour it out what you get is a recipe for people spending more than they should on the premise that they'll earn more than they will. And so the spiral of having less the next time continues.  

Is it manageable, this spend/return equation? It is, but not all at one shot it's not. As the world changes and as returns change, so to must the math. The math is long and complicated and what's harder is that there are more than a few subjective inputs that go into constructing the framework. (Note: You shouldn't be developing the subjective framework, though clearly you should have input into it's components and it's design.)

This is where we make the case for Wealth Manager as guide, not map maker. Most consumers when considering the use of professional wealth managers default to the fact that no one can be all seeing and all knowing so why pay for advice that can't stand up over the test of time? The fact is; when was someone doing something about a problem ever better than someone doing nothing about it?

The reason that wealth management is both art and science is because an "exact science" it is not. But like any good guide, you start from the premise that you can get to the destination in any number of ways, the question is; which one will be most efficient given the details as they play out. 

Were it for the math alone, personal finance would be hard. The fact that the math changes as much as it does makes it even more difficult. 

All things being equal; when you contemplate your future don't lose sight of the fact that you make many contributions to the math, but perhaps the most important one is by deciding what to spend and why. While it's only one variable in a very long equation, it just might prove to be the most powerful one of all. And unlike the markets, you control it.