We left off in the last article Financial Planning Simple not Easy with the 3 simple steps of financial planning:
Establish your current financial position.
Create a plan.
Action the plan.
The 3rd step is probably the most important, as plans are meaningless unless put into action. I mentioned that a financial planner that specialises in behavioral coaching can really help with the implementation and accountability process.
Consider the following great advice from a doctor that prescribes the following for a long and healthy life “eat healthy and do regular exercise”. This is simple very sound advice, as is “income greater than expenses and invest the balance for your future”.
Why is it then that there are so many unhealthy, financially poor people out there?
I suggest that if we know what to do, why don’t we just do it? This is where it starts to get complicated and we start delving into the complexities of behavioral biases, conscious and unconscious habits and all the emotions that make us human.
Money = Emotions
This is what makes things like sticking to a regular healthy eating and exercise plan or financial plan so difficult because it is in the actioning of that plan that all our emotions and biases come out to play. It is human nature to seek the easy solution, the get rich quick scheme, the magic pill or silver bullet. It is not that we don’t try to consistently do the right thing, it is that it is difficult to consistently rely on our self-control and will power over longer periods of time. It is not easy to pass up that delicious donut every time you walk pass the corner bakery. It is easier to not walk past the bakery in the first place, so you don’t have to use up your limited self-control every day and finally give into the temptation.
Let’s take the first step in our financial planning process and establish our current financial position. There is a saying that your calendar and cheque book never lie as to how you spend both your time and your money.
This is an area where I have personally struggled. I know the first step of financial planning and I talk to clients about getting together a table of income and expenses based on the past year every day. I always wonder why very few, if any take my advice and present me with an account of their expenses and income over the last year. I have heard a lot of excuses and been given a number of reasons why it hasn’t been done, so much so that I thought I must do it for myself. I always pride myself to lead by example yet haven’t ever done an accurate table of income and expenses for the last year. Why not, I must be crazy to think that clients will diligently go ahead with my advice and get their expenses and income together if I haven’t done it myself. Trust a chef that eats his own cooking, or don’t trust a chef that doesn’t!
I thought I could focus for a couple of hours and come up with my personal income and expenses statement and at the end of it have a lovely highlighted, categorized spreadsheet that I could give to our clients as a template. A week later and I finally had a sheet with all of my income and expenses for the last year. What took me so long and why had it taken me so long to actually action the first step of the financial planning process myself? Biases, emotions, perceptions, procrastination, basically my behavioral biases were like the little devil on my shoulder telling me that this wasn’t that important, it would be easy, my perception as a professional financial planner that this was simple advice and my own finances were in good shape. The reality was this process is hard and I found all sorts of excuses not to do it. What would our clients think it if I couldn’t even do the first “simple” step myself? Fear that I wasn’t putting enough money away for a rainy day”. I didn’t want to see the reality of last year’s income and expenses staring me in the face, I should do more, I can do better.
Money = Emotions
So how do we “Action the plan”?
Get help to better understand your behavioral biases.
Put steps in place to automate action so you don’t get decision fatigue and can overcome those behavioral biases.
Action the plan and leave it alone.
The recent market crash and subsequent recovery was a real test for your financial plan. I trust most advisors told you to sit tight and do nothing and you didn’t make a short-term decision on your long-term financial plan, like panicking and selling low.
Just like a good personal coach will check in with you regularly and check parameters that show you are making progress, make sure your advisor holds you accountable to actioning your plan rather than giving you some out of date market commentary on why the gold price went up, down or sideways.
Remember the emergency fund, how important has that turned out to be.
Try and set things up so that actioning the right thing be it “eat healthy and exercise regularly” or “keep your expenses less than your income and invest the difference for your future” becomes automatic and consistent. Action your plan and automate your actions consistently and regularly. We can always be a little healthier, fitter, or wealthier, so stop reading this article and go “Action your plan”.
Seriously, you know what to do, you have a plan now go and action it!
Thanks again for your attention.
John Browett CFP®