By Patrick Amey
Trying to become a financial planning perfectionist is certainly an easy trap to fall into. You want to avoid the scenario where planning gets in the way of action. Fear of making the wrong decisions is a powerful thing and often times keeps people from making decisions at all. As a financial planner, I see the drive for perfection becoming a problem in two main areas:
- Trying to Time the Markets. “I’m waiting for a pull-back in the market to invest,” is something I hear frequently and isn’t wrong per se. Wouldn’t it be nice to have a crystal ball and buy when the market is down? This type of contrarian and value based investing made people like Warren Buffet one of the world’s wealthiest individuals. But this is very difficult to do. What is a pull-back – 10%, 20%, 30%? People often try to get this perfect and miss an opportunity. There are a few ways to avoid this pitfall. You may invest a consistent amount regularly (dollar cost average) so that you are buying more when the market is performing poorly and less when it is doing well. If you want to have access to cash to buy into markets when they are doing poorly, you can also store cash and earmark the cash for special investment opportunities. Of course, you’ll have cash making little returns, sitting there dragging returns down.
- Budgeting. This is another area where I see the desire to have everything perfect get in the way of progress. Two behaviors are prevalent:
- Wanting the numbers to be exactly right. I’ve seen budgets for groceries down to the penny. While I appreciate this hard work, it is very rare that the exact same amount can be spent on groceries each month and determining the right amount can be painstaking.
- Leaving little for deviation. There are non-monthly expenses that are a normal part of life and can be difficult to predict. If you don’t make room for these in your budget, you may find yourself disappointed and discouraged at the end of every month. These can be things like gifts, car problems, or medical bills. Life and the budget that accompanies it, can be unpredictable.
One way that people can remedy this is by having a cash flow system that allows for flexibility without guilt. You can accomplish this by having two accounts; a monthly account for regular expenses like utilities, groceries, dining out, and a periodic account for irregular expenses like insurance premiums, auto maintenance, or travel. A portion of income can go into these buckets with each paycheck. This helps keep your month-to-month budget intact, and allows for flexibility and decision making on the ‘extras’ that come up each month.
Carl Richard wrote a great book that touches on perfectionism, called The One-Page Financial Plan. In it, he talks frequently about the benefits of guessing or estimating when it comes to your personal finances. Guessing and estimating don’t preclude you from updating your estimates and guesses as you go. Financial plans, budgets, and markets are dynamic and require consistent monitoring and updating. The perfect plan is often times perfect only for a limited period of time until the underlying assumptions and fact change (and they will).
If you need help to build a financial plan with flexibility, schedule a meeting by clicking below, contact Patrick Amey –pamey@makinglifecount.com, or call (913) 345-1881.