When you talk to people about personal finance, it becomes apparent that most people you talk to have very little in the way of long-term financial plans. A quick scan of retirement and personal finance statistics gathered from any authoritative source would indicate your assessment is correct. Americans in particular tend to live their financial lives from storm to storm, trend to trend, fad to fad, and fear to fear.
Part of the blame lies in the sorry state of financial literacy among Americans. The fact the wealthiest nation on earth has such a poor core understanding of money is one of the things that drives my decision to pursue this effort after all. A bigger part of the blame lies on our biology. As a species we are hard wired to prioritize our immediate threats and needs over our long-term goals. Our dopamine and serotonin receptors reward best life living, at least as far as that went with our predecessors. Those same receptors penalize long term planning and focusing on the future as drab and dull chores that are best avoided.
The “live your best life now” approach does very well at keeping a predator at bay, finding enough daily calories, and ensuring your genes live on in your offspring. But funding your independence three decades from now? Not so much.
The antidote to this state of your biology is a long-term plan. As I’ve previously written, I’m trying very hard to move away from the term retirement and more toward a plan for financial independence to be more precise in my language. I’m also doing that because our society somehow fixed our 67th birthday as the day we can finally retire and for many people younger than 60, that day seems well over the horizon. Far enough, in fact, to not think about it in any sort of tangible terms at all.
That is completely backwards. Your long-term plan is your guardrail against all of the suboptimal decisions (see: dumb ideas) that will present themselves over the course of your adult life. Please make no mistake, dumb ideas will be served up to you by your friends and foes alike every single day. Some of it will be plain vanilla bad advice like “buy a house as soon as you can”, some will be rampant consumerism like “you simply need a new iPhone”, and some will be blatantly predatory like “this financial product is all gain with no risk”.
When you interrogate a dumb idea under the light of your long-term plan, those ideas get less appealing and a lot more transparent as to what their true nature is. As a bonus, the dumb ideas you actually do will be smaller, fewer and with more limited impact.
Your long-term plan will help you separate wheat from chaff when it comes to your ordinary expenses. For instance, do you really need a new car or a new house? The answer may be “yes”, but your plan draws limits around the decision. For example, we recently bought a new car after relocating from another state. Our plan determined that a new car purchase was fine and in alignment with our current resources and long-term goals, but it wasn’t going to be a new Lexus. Those extra funds needed for a new Lexus over a more pedestrian Toyota served better purposes in our plan as Roth IRA contributions and topping off the HSA than interior leather and premium sound.
In the same vein, we really want another single family house. With real estate prices high in our new area and interest rates moving up, our long-term plan says that our apartment is just better for the time being while our equity perks along making us 8% or so. While we can certainly buy our “dream home” at current prices and rates, it would require another decade (or more) in the workforce from my planned exit and likely lock us into a specific house for much longer than we intend.
Without a long-term plan, we’d have a new Lexus in the garage we co-own with a bank. We’d also get to drive it to a job until we’re 80. But our long-term plan isn’t to own a house, or drive a Lexus, or spend a half day in the office on the day we die.
Our first financial plan is financial independence, and everything else can get in line behind it. If you’re not playing the long game in your finances, you don’t have one.
