Proactive Financial Planning is About Choices

Dana Brewer, CFP®
Jun 9, 2020 1:00:00 PM

Proactive Financial Planning is About Choices – Birchwood FP

Having money can give you choices. Money doesn’t promise you happiness nor does it shield you from loneliness, but the choice of how you live with money may positively impact your life. So what can we do to make those choices a little bit easier? Let’s start with a philosophical question: Why is it so important to have choices in our lives? 

  1. Motivation – choices can make us feel happy, giving us a feeling of autonomy and a sense of control. 
  2. Tradeoffs – Having choices allows us to leverage our judgment. We can compare one choice to another and use our judgement in decision making. 
  3. New Choices - Making a choice often allows us to make new choices in the future. For example, because I choose to save more from my paycheck, I can imagine more choices. 

When it comes to your personal finances, whether you have more or fewer choices begins with your priorities and a combination of principles: 

  • Live on less money than you earn.
  • Understand that money is a tool and you get to decide how to use it in your life. 
  • Set aside money for your future.

I believe these three ingredients make up the “secret sauce” in the recipe for having a healthy relationship with money and they are the foundation for creating a proactive financial game plan. It sounds easy, but as we all know, it is often difficult to make those tough choices. 

Create a Financial Plan

By having a plan for every dollar and planning for future expenses, you can take control of your money instead of having your money control you. Budget apps are useful, but they are typically designed as a reactive measure to account for every dollar that flows through your household. With a proactive plan, and clear goals established, you can gain motivation from knowing you are on track to accomplish your goals. You may even find money you didn’t even know you had! 

Bucket Budgeting

I’m a big advocate of Bucket Budgeting, and the real beauty of having multiple buckets of money is to create a framework for tradeoffs. For example, you may have some money set aside for a vacation or to purchase your next car, when along comes the opportunity to take the trip of a lifetime that costs more than you had planned for your vacation that year. What tradeoffs are you willing to make? Do you decide to wait another year before you buy that car or take that trip? Do you not go on the trip? Or do you decide to live less expensively for the next few months or longer to be able to afford the trip? The buckets will help you see the money available for the tradeoff decisions. Without money set aside, your only options are using credit or staying home – and neither one may be very satisfying. 

Too Many Choices

Having enough money to make choices is a good thing, although there may come a point when having too many choices can impair your ability to decide. The jam study from the early 2000’s showed that too many choices can actually deter us from making decisions at all. This is why it is important to put context around your choices in advance. What are the short- and long-term goals for the money you have saved? What is most important to you and your family? Working with a financial advisor can help you sort through your goals and add context to what needs to happen, from a financial perspective, to achieve them. With your plan front and center, you will be able to easily decide which “jam” is best for you. 

Once money is set aside, you get to make the fun choices and figure out how to spend it! If you see progress towards your goals, you may be motivated to add new goals. When you have clarity about what is important to you, the tradeoff decisions become much clearer. As you shift your relationship with money from being reactive to being proactive, you will be presented with new choices that you may never have believed possible – and you will be better prepared to make the best choice for you.

Investment Advisory services offered through Birchwood Financial Partners, Inc. an SEC Registered Investment Advisor.

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