We started this article series talking about your money and your emotions. Our emotions have an effect on financial matters, whether we realize it or not. The everyday decisions we make also have an impact on long term success. Those decisions are made at the ice cream stand, the hardware store, the auto repair shop, and with many other things that don’t directly relate to investing.
Large vs Small Decisions
No one is blind to the fact that large purchases have a profound impact on financial plans. One of life’s little secrets, however, is this: our (seemingly) insignificant daily decisions play a bigger role in long term outcomes than most people realize. It’s not just about the dollars and cents. It’s about decision making habits, process and style. It’s about the landscape of your thinking.
You Write Your Own Rules
Your primary influence in money matters may have been your parents or other important people around you. You eventually form your own opinions and guidelines. Your guidelines aren’t set in stone and evolve through life’s experiences. The habit of buying your son’s ball team a weekly round of ice cream cones or buying drinks or dinner for the group of friends turns into a more general habit of painting outside the lines. New rules are formed without realizing it.
One of the best decisions you can make is to get an objective third party to help you write the financial rules you want to live by. Once the rules are established, it then becomes important to create a feedback loop for them to help you live by those rules. In the ebb and flow of life it’s very easy to lose sight of your established guidelines. A system of review keeps you on track. The good news is that people can adapt to a more disciplined approach when they understand the benefit they’ll enjoy in the long run. What starts out difficult can, in time, become very satisfying.
Living the Dream vs Living the Plan
A big mistake is made when people try to buy everything they think they can afford… right now. They fail to leave themselves enough financial margin to allow for changing conditions.
Here’s an example. A family buys a home at the top of their range of affordability. They’re thrilled with their new situation until a spouse loses their job. A poor economy means that the job loss is more than a temporary setback. The pressure mounts, as bills go unpaid. Their beautiful home is no longer a place of refuge, but a ball and chain. It goes without saying that nothing is being set aside for their future. The rest of the story gets very ugly.
What if that same family had a different, more conservative pattern of decision making? What if they bought a smaller home that still met their needs? The job loss would have been unfortunate, but the negative long term impact would be far less. They’re still able to get their cars repaired and keep up with basic home maintenance. Is their home everything they ever dreamed of? No. But they’re living the plan that will eventually lead to some of their dreams being fulfilled. Their story is generally happy.
The point is this: The buying decision for the home was influenced by the pattern of decision making created at the ice cream stand, while out with friends and at the hardware store.
Apply the Stress Test
The Krilogy team likes to apply the “stress test” with our clients and their financial plans. We take into account possible changes such as rates of inflation or expected growth, potential significant events (both foreign and domestic), such as the most recent Brexit scenario, and other factors that can seriously alter their portfolio. Those potential scenarios serve as guideposts for investment and lifestyle decisions.
The stress test should be applied to your day-to-day buying decisions, both large and small. Simply ask the question, “What if…?” What if a job is lost? What if a child gets seriously ill? What if a car conks out before its time? This isn’t about living in fear. It’s about making daily decisions in light of certain possibilities and leaving room for a few curve balls.
The Impact of Non-Decisions
One of my biggest challenges as an adviser has to do with the occasional situation where an individual fails to follow-through or make a decision. We create a framework and patterns of action to help our clients achieve their goals. We help them define the rules they want to live by. Every meeting ends with a recap, covering action items for our clients and for the Krilogy team. We take great pride in the day-to-day decisions we make as we manage their portfolio. Our team is accountable to do our part, but the best outcomes happen when our clients also do theirs, which we’re proud to say they often do.
We make great suggestions, but long term success partly depends on our clients’ follow-through. It might relate to finding documents necessary to refinance the home, providing detail on budget, or providing an insurance statement for review. The point relates to priorities. The best outcomes materialize when people make decisions and take action regarding other elements of their life.
Decisions about Time and Bandwidth
We’ve all been in situations when our internet connection was painfully slow. It might be at a coffee shop or the ball game, but when your demand for information exceeds the available bandwidth of the network, it’s frustrating.
Your life also has “bandwidth,” based on the choices you make related to your time. Your day, your week and your entire world easily get filled with activities related to work, play and other responsibilities. Failing to leave bandwidth or margin for important decisions will hurt you in the long run. On the other hand, your financial future will brighten when you pay attention to your day-to-day decisions and leave yourself the time and energy to follow through with things that matter.