The Value of Simplification
As a Certified Financial Planner™, it will come as no surprise to you that I have a tendency toward optimization – seeking perfection in any endeavor. Candidly, this serves me well in my craft. Clients rely on me to consider all the angles, identify the best path, and help them follow through with their strategy. You wouldn’t want your financial planner – nor your accountant, pilot, or surgeon – to be particularly comfortable with ‘close enough.’
On the contrary, the benefit clients often tell me they value most isn’t necessarily when we dive deep into the weeds; it is the help simplifying their complex lives. Of course, clients expect that I’m focused on the details; that’s simply a core competency of any capable financial planner (and quite likely in your profession as well). Rather, the game-changer is the process of taking something 1) complex, 2) massively impactful, and 3) occasionally overwhelming and making it relatable, transparent, and personal.
Let’s paint a quick picture. My typical client is in their 40s, has one or more children, a demanding job, a spouse, and a financial picture that feels increasingly complicated. The stakes of financial decisions are rising, keeping up on new developments is becoming more difficult, and – quite frankly – there are other things they’d rather spend their time and talents pursuing. That combination is not a great feeling. When this occurs, it is natural (and understandable!) to kick the can down the road and muddle through by doing things as they’ve always been done.
A better experience is possible, however. Let me say this slightly differently: you can feel more confident that your financial decisions will take you where you want to go. What follows are three ideas for how to make simplification – and better results – happen.
#1 – Get Clear on What You Want
I know, I know; it’s so obvious. But despite being obvious, becoming incredibly clear on what you want your money to do for you – and more importantly the life you want to live – is often hard to do. New clients may be surprised by how much time we spend painting as detailed a picture of their goals as possible before ever talking about numbers. (They’re also frequently surprised by how much fun it can be to discuss these things with someone other than a spouse, family member, or friend).
What makes this process more complicated, however, isn’t naming what we want. That’s easy! Rather, it’s that we – as humans – inevitably have conflicting wants. This takes many forms, of course, but several specific examples from recent conversations are:
Buying a vacation home vs. accumulating more investments for their future
Investing in kids’ education vs. financial independence
Paying off a mortgage now vs. investing for growth potential
Perhaps one of the greatest ‘ah ha’ experiences clients report to me is seeing the tradeoffs of their decisions in real, tangible terms. In my experience, this often makes the decision – whatever it may be – much easier. My suggestion to you – learned from countless clients – is to distill the decision you’re considering to it’s most essential and basic tradeoffs. Everything becomes easier when simplified down to this level.
#2 – Know Your Numbers
It’s not alluring, but it’s necessary. Like the gauges in a plane’s cockpit, a real understanding of where you are presently is crucial to making any decisions. Several examples are:
Knowing where your money is coming from and going toward (cash flows)
Knowing what you own and what you owe (net worth)
Knowing what you’re paying in taxes (marginal and effective rates)
Knowing how you’re invested (risk-return profile)
Knowing when you’ll be debt-free (reduction strategy)
A funny thing occurs for clients nearly every time we walk through these topics together: a sense of relief. This catharsis often comes from knowing where you stand, and knowing where you stand is the first step toward a sense of control over your financial future. Who wouldn’t want that?!
#3 – Figure Out What Matters
Contrary to what some “experts” espouse (condescendingly, IMHO), a daily Starbucks or local coffee shop stop likely won’t make or break your financial future. That is not what matters. I learned what matters by watching the financial lives of countless families.
Rarely does an individual choice set a person up for financial well-being or failure; more often than not, the key difference is whether they have a lens for deciding what really matters and seeing their decisions clearly.
The challenge here is quite simple: telling the difference – especially in the moment – between a big deal and something inconsequential is often hard. The point Starbucks-naysayers are making is that, cumulatively, small decisions can matter as much as big ones. I certainly would not debate that point. What they miss is that not all financial situations are equal. For one person standing in line, perhaps that daily $7 cup of joy (oh, how I love coffee) has truly no bearing on their financial well-being. And yet, for the next person in line, the little things may be adding up to a disaster.
But how are we to figure out what matters? Several ideas are:
Find the pressure points. Plenty of plans look great on paper, but they must survive real-world stressors and risks. For example, buying more house than you can afford may pencil out in the long run, but you must also be able to overcome financial hurdles when they arise. Water heaters leak and flood basements, unplanned trips to the ER happen, and the unexpected should be expected. Stress-testing your financial plan can shed light on the difference between a setback and a derailing event.
What compounds will usually move the needle. I’m a big fan of James Clear’s “Atomic Habits.” The same underlying concepts that he shares of compounding habits applies to finances. Actions build on themselves and become greater than the sum of any single input. The examples are ubiquitous.
The compounding nature of investing.
Debt becoming a revolving door.
Tax-efficiency for faster growth.
And the list goes on…
Inertia is a big deal. Newton was right: objects in motion stay in motion, and objects stay at rest unless there is an outside force. What Sir Isaac probably didn’t ponder is just how apt this metaphor is to humans and money. Those that save tend to continue saving, and those that have a habit of paying down their outstanding loans often do so each time they use debt as a tool. The very best means I have found to build inertia is through automation. Have the automatic transfer from your checking to your investment account and setup the recurring extra monthly payment. You quickly become the beneficiary of inertia and are doing great things for yourself.
Let’s look at this concept slightly differently by trying a thought experiment: when was the last time you a) changed your 401(k) deferral amount, b) updated your ESPP contribution, or c) changed health insurance coverages? For many, the answer is ‘when I started the job.’ Making great decisions with these things while they have our attention can have months or even years of impact. If you want to simplify, a) get them right from the start and b) have a trigger to review as needed.
Conclusion
As we wrap-up, I’ll leave you with this final question: What is one takeaway from these musings that you can immediately implement to simplify your finances? Perhaps it is understanding the tradeoffs you are already making. Or maybe it’s setting up a tech tool to track where your money is going. Still yet, it might be setting up monthly deposits into your child’s 529 plan account. Whatever it is, I hope this message has helped you to take action that will make a difference in your financial life.
If you would like to setup a time to talk more about how to simplify your finances, please reach out to me here.