When Financial Planning Fails

July 18, 2008 – 4:57 pm

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failed financial plan I followed the usual recommendation and map up a plan for my finances years ago. I have stuck to the plan well enough but I do not feel better off today because whatever savings we have doesn’t seem enough to beat the higher food prices, higher tuition expenses, higher gas prices etc. etc. In fact, my feeling is that the saving habit has only made me give up a lot of things that my family could have enjoyed instead. That happiness would have been at least tangible but the reward of saving seems just a nice concept right now. What am I doing wrong? — Paul F.

Paul, I hope that your financial plan was tailored to your requirements rather than some one-size-fits-all approach. Making sure personal situations are reflected in your financial plan makes the plan a livable approach rather than a painful sacrifice of what to do and what not to do.

Keep in mind that a financial plan is just a initial point. It enables you in putting you in the proper attitude, but any plan cannot be successful if it is held completely insulated from changing circumstances. Could it be that you feel let down by your financial plan because the information have not been updated to adjust to the changes with your family needs and in the financial market?

Financial plans are like our homes. Even though we try our best to protect it from any calamities, repairs come up every year. We may be fortunate enough not to deal with a fire, tornado, hurricane, flood or a broken window hinge this year, but sooner or later changes are necessary.

We can, of course, choose to do nothing. The problem is that a home will decline with unresolved repairs creating new and worst problems. Doing nothing hurts us because we are allowing ourselves to miss out on opportunities. The longer we decide to do nothing and the more extreme the changes are, the more our financial plan becomes ill suited for our needs.What opportunities are missed and how do these hurt us?

Until recently, global interest rates were normally low and were being paid lower. A sensible financial adviser will recommend to his client that:
[a] he needs to set aside more occasionally to be able to invest more or
[b] invest in higher-yield but higher-risk instruments or
[c] consider fixed-income instruments for their capital gain upside or
[d] downsize the amount he wants to attain upon retirement or
[e] some mixture of all of the above.

By choosing to do nothing, our financial plans will surely fall short of our targets because we will continue to reinvest at constantly lower rates.

Inflation is another plan-altering factor, but it is a quiet assassin. Officially, inflation numbers are reported after-the-fact (how the general price level moved over the past 12 months) but we live through the price increases contemporaneously.

This difference between “yesterday” (what is reported) and “today” (what we pay for) raises up another issue with our financial plans because interest rates are all about “tomorrow” (a promised reward in the future). This difference in timing is material to our financial plans because it changes the real value of our financial worth and our purchasing power.

We need to be anxious about matching yields with future inflation. Only when our investment yield is higher than inflation — properly timed — are we moving forward.

Regrettably, there is no quick-financial-fix to deal with higher inflation chiefly those that are borne out of spikes in key supplies. We just have to observe and re-balance our portfolio to better lessen the erosion of inflation. By adapting our financial plan, surely we can still lose value. The difference is that doing nothing guarantees that loss while doing something raises that likelihood.

Which brings me to this point: do talk to advisers who do these things competently. Our saving and our outlook are too priceless to take a chance on hit-or-miss strategies.

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