Let’s face it: We can’t have it all. But if we make wise choices, we can have a lot. Here’s how…
The ability to set meaningful goals and then chart a course toward them with practical milestone deliverables are two of life’s most valuable skills. In my day-to-day work as a licensed financial planner, the key philosophical touchstone I use to anchor my client-planner interactions is this old definition of my profession:
“Financial planning is the process of meeting your life goals through the proper management of your finances.”
Sadly, most people don’t take the time and trouble to set written goals that help them blueprint their respective life journeys in a proactive, aspirational way. Instead, they tend to drift, driven by life’s breezes, gusts and, occasional, hurricanes.
So, perhaps the main reason for the usual chasm between what we want tomorrow and what we do today is this constant war between our aspirations and our appetites.
CHOICES WE MAKE
For a long time, my practice has been focused on helping clients understand The Law of the Excluded Alternative when setting goals and living life. In simple terms, that means given our limited supply of money and time, when we commit to one choice, we automatically exclude another.
For instance, when we choose to spend some free time playing video games, we can’t use that same period playing basketball. When we opt to spend some of our surplus cash flow on a depreciating asset like a car, we can’t use the same money to invest for growth by buying bonds, stocks or real estate.
That doesn’t mean we should never indulge in any fun electronic games or that we should never buy ourselves a nice set of wheels. Not at all! We just need to be aware of the consequences arising from each spending decision, be it of our time or our money.
We live better when we make considered choices about our finite resources. Toward that end, there is an economic concept called a ‘util’ which assesses how much fun or joy or personal benefit we derive from doing a certain thing or consuming a particular good and service.
A UTIL
I was first exposed to this concept more than 30 years ago when, straight after university, I joined KPMG as a trainee chartered accountant. Sandwiched between work stints at the office in Basingstoke a little over 80 km southwest of London and on-site audits for various corporate clients, including BMW UK, I attended intensive courses to get through what was called the Graduate Conversion Course or GCC.
One of its six examination subjects was economics; and in it, the lecturer exposed us to the idea of a util through the relatable example of each of us being ravenously hungry and then stumbling upon a tray of freshly-made... doughnuts!
When we ate the first doughnut, taught the lecturer, our utility level or util count was highest, say 10 arbitrary util units. When we ate our second doughnut, it was still enjoyable but less so, say 8 util units. With every subsequent doughnut eaten in that same hypothetical dessert-devouring spree, the number of utils derived drops until we’re fully sated.
The same concept applies to eating your first satay and your 21st, say, in a proper Malaysian meal; or to flying on a plane for the first or second time and doing so for the hundredth time.
This idea applies to our long-term journey toward financial freedom, too. We would do well to use our personal perceptions of util derivation to proactively limit our consumption levels so we can save and invest more aggressively and intelligently.
OF GOALS AND SACRIFICES
I recently completed a portfolio review meeting with a client whom I’ve worked with for a year. Given her delicate financial state when we first met, I started her off on a savings programme that used bank savings, money market funds and bond funds, but not — yet — allowing her to invest in domestic and international equities.
Part of the reason she was in a delicate financial position was her previous tendency to spend all or more than her monthly income on clothes, shoes and facial treatments.
While none of those purchases is bad, given her limited finances The Law of the Excluded Alternative was hard at work precluding her from building wealth through the purchase of productive assets because of her low bank balance and growing credit card debts.
As she began her modest savings programme, her ability to think through the relative value of different spending and saving choices grew. So much so, I was ecstatic to learn she recently decided to buy her first piece of property!
During our latest client-planner review meeting, she told me the prospect of purchasing her first home helped her focus her cash flow utilisation on saving money instead of buying more footwear and dresses than she needed because of her already brimming wardrobe.
In your own financial journey from where you are today to where you hope to be tomorrow, I urge you to consciously think about what you want in life (your key goals) and what price (sacrifice) you’re willing or even eager to pay to get it.
That specific thought sequence is THE KEY to making better lifelong financial choices.
© 2019 Rajen Devadason
Rajen Devadason, CFP, is a Licensed Financial Planner, professional speaker and author. Read his free articles at www.FreeCoolArticles.com; he may be connected with on LinkedIn at www.linkedin.com/in/rajendevadason, or via rajen@RajenDevadason.com You may follow him on Twitter @RajenDevadason.