Often I find that the psychology of investing and financial management is more complex than the mechanics of it. Once a person understands why they behave a particular way about money, they easily accept the changes needed to get them to their financial destination. But without fail, unless these behavioral patterns are understood, people only find limited success. Ultimately, their financial goal progress is stifled until the “a-ha” moment arrives. So, how do most happen upon this so-called nirvana of financial omniscience? Well, more than being magical, it is a progressive journey and not always intuitive. Recently I recorded a podcast on “Aligning Your Capital with Your Values” part 1 and part 2 that highlights what I’ve uncovered in nearly two decades of work. Here are some things I’ve noticed that have created success with financial plans.
Create a money creed.
Establish what is important to you and write it down! Instead of feeling neutral about money and what it can be used to do, many people either feel a sense of abundance or one of scarcity. Unfortunately, this can produce a mindset of overconfidence or fear. Instead, individuals should focus on all the things that money cannot replace like relationships, integrity and beliefs. The end goal should be to use money and value people, not the other way around. This is why it is important to think about the things you value and let that drive how you will think about and therefore use money to build around those values.
Create an accountability system.
Accountability can often be a scary word, depending on what you are unwilling to be transparent about. However, I’ll submit that being unaccountable in your financial management plan can be catastrophic. How are most people held accountable? Budgeting. Yet, in 2013, Gallup found that 2 out of 3 Americans didn’t have a budget. So what is my advice? Establish a budget. At a minimum, quantify your discretionary and non-discretionary expenses. Having a list of all your non-essential expenses will help you understand what can be reduced or even eliminated from your spending. This will give you the extra cashflow to pay down debt and save toward your goals. Accountability may also come in the form of hiring a financial advisor to help you clearly articulate goals and stay accountable to what you want to do. Whether you choose the DIY route or the coaching route, the bottom line should be achieving results.
Create a realistic plan that includes an investment policy statement.
Most individual investment plans lack an investment policy statement (“IPS”), and the ones that do are usually not thorough enough. A complete IPS has the following components:
- Risk tolerance– including an investor’s willingness and ability to accept risk;
- Return objectives – the rate of return needed to meet current and future cash flow needs;
- Tax, legal and other constraints– will there be gifting concerns, tax considerations or other important reasons to include;
- Asset allocation- all assets should be considered not just those that will be invested “in the market”. The Aspirational Investor by Ashvin Chhabra is a good treatise on the inclusion of total net worth, not just investable assets.
- Monitoring system – arguably one of the most important parts of the process to gauge whether or not progress is being made towards goals. I advocate a system that tracks the desired return for a group of assets to an appropriate benchmark.
So there it is, a framework for not just putting your money where you mouth is–but where your heart is!