As I was taking a walk the other day, I got to thinking about a commonly used analogy when discussing financial planning. The idea is that a good financial plan is like a roadmap, which you need to follow towards your financial destination. Upon checking, I noticed that we had also used the word “roadmap” on the front page of our own calculator.
Thinking about it further, I realised that a roadmap is not really the best analogy. At least not for the most useful financial planning tools, in which category I count our own. In the driving context, a roadmap is typically static. When the road layout changes, you need to wait for a new published version of the map. This can be confusing when you’re already en route to your destination! Also, a roadmap shows you the available roads, but it doesn’t set you on the right course. You still have to decide on what route to take.
Similarly, you can use a financial plan ‘roadmap’ as the basis for making financial decisions. There are quite a few online tools for this. Whichever tool you use, you need to update it to reflect changes such as:
- Fluctuating asset values.
- Expected future investment returns.
- Major life changes.
After such updates, you need to use the tool to re-evaluate any decisions you’re thinking of making.
A Sat Nav For Your Financial Plan
A Sat Nav can be a better driving tool than a roadmap. It starts off by determining your present position. You tell it your desired destination. It calculates an optimised route. Along the way, you may veer off course, or changed traffic conditions may be fed back into the device. It recalculates your route, starting from wherever you happen to be. At any point in time, as you follow the instructions, you’ll be headed in a sensible direction.
Similarly, for a financial planning tool to be really useful, it needs the ability to adapt to changing circumstances, which are an unavoidable fact of life. The path ahead has unpredictable elements, to a much greater extent than driving. With finances, just like with driving, you can veer off course through your own mistake. Or more likely you’ll veer off course through changes in circumstances beyond your control. A driving Sat Nav calmly and unemotionally guides you back to a good route. Similarly, a useful financial planning tool needs to be able to re-optimise your cash flow planning based on the latest information.