I tend to see how the financial planning process fits just about everything. I can be sitting at a sporting event and compare the team’s process to our financial planning process. The latest example…elections.
I considered the key talking points as election results came in. As expected, there was a high level of emotion and conflicting opinions. Emotions and opposing viewpoints can be good or bad. It depends on how they are used. Financial planning is similar. Money decisions are often emotional. There is a wide range of opinions shared as you consider the best financial decisions.
As we consider the key agenda points as the new Congress begins in January, I considered how the political agenda compares with financial planning…directly and indirectly.
The cost of borrowing
Government spending is always a key talking point. As Democrats take control of the House, the volume will likely increase. Don’t worry, they will still spend. The increased volume will be about where to spend.
Spending is the most important component of your financial plan. Lifestyle increases with the addition of debt. You spend $1,000 today and only pay back $100 next month. Debt is not necessarily a bad plan. Accepting additional debt without a plan of how to repay it is a recipe for disaster.
Like individual plans, government debt allows an economy to enjoy a higher lifestyle as well. In both cases…the bill for the higher lifestyle needs to be repaid. Watching how the new Congress addresses this will be interesting. I don’t believe there is a no-cost solution.
Short term pleasure, long-term payments?
When considering a personal financial plan, it is a lifelong process. Knowing the tradeoffs between today and tomorrow, you balance short and long-term goals and needs. Government leaders have a different time frame. They focus on two, four, or six-year frames. If you wouldn’t be around when the debt needed to be repaid, would your viewpoint change?
Government leaders must be short cited in they want to keep their job. By the way, this is also true when considering most corporate leaders. Leaders are incentivized to make short-term decisions that help today’s optics even if the decisions decrease the likelihood of reaching future goals (knowingly or unknowingly).
When considering your plan, we balance today and tomorrow. A common example is the balance between helping kids with college costs and funding retirement. The standard answer is to pay for retirement first. The student can borrow for college; retirees cannot borrow for retirement.
Sometimes the standard answer isn’t the right answer…for you
The standard answer isn’t always the right answer. Parents often plan to help with college costs even if their retirement is not fully funded. They understand the tradeoffs. But they feel helping with college costs is an important goal (for them). When this is the case, we need to balance the two goals and be flexible.
Government leaders know (or should know) there will be a cost for the issuance of cheap money over the past ten years. A current higher lifestyle which is funded with debt will eventually have a cost. In 2008, they considered their options (like college versus retirement).
When considering a financial plan, we know the likely outcome. We aren’t sure what the ultimate cost of cheap money will be. Maybe the cost will be minimal, but I doubt it.
The current immigration debate continues with increased emotion, both within the United States and abroad. When considering immigration, a “successful” outcome means different things to different people. Like most difficult decisions, we could simplify the discussion to numbers and find a potential best numbers answer. That doesn’t make it the right one.
A country could treat a new immigrant like a Chief Financial Officer considers a new employee. The CFO makes a logical choice based on the expected cost and benefit of adding the new employee. The CFO knows there will be fixed and variable costs involved in the hiring (and continued employment) process. There is also a measurable benefit (hopefully) the new employee will provide. When the benefit outweighs costs, the CFO will hire. The difficulty lies in the need to make future assumptions.
You may not be hiring new employees, but as CFO of your family, you make decisions based on future expectations. Your right answer may not be the right answer for another family even if the numbers look the same from the outside. If families only focused on numbers, the answer would be similar across the board. If this were the case, there would be no need for discussions about differing opinions. Luckily for me, discussions will always be the most important component in the planning process.
The new Congress needs how to get back to discussions rather than fighting. We often find interesting options and surprising outcomes when we step away from our preconceived solution.
Infrastructure is a good idea
The idea of rebuilding America’s infrastructure has been a political discussion long before this election. This is an agenda item I believe most politicians agree. We should rebuild/repair roads, bridges and utility infrastructure as needed. The question is not whether we should rebuild and repair. The question is how to pay for it.
When discussing personal financial plans, we spend a lot of time discussing goals. We consider what retirement might look like. We consider all the things you would like to do. In the process, we determine if each goal is a Need, a Want or a Wish. If you could afford all of them, no problem. But most of us can’t afford all the desired projects. If we could, we might add new ones.
During a recent review, a client asked about an annuity being offered by another advisor. I pointed out that the commission would be $35,000. The client shared the cost might be worth it. By the way, she was right.
I pointed out that history shows we would likely achieve similar or in most periods greater results without the cost. The main reason being we could reinvest the $35,000 and the additional ongoing higher fees. In this case, the client can afford the cost, but the additional cost may impact another desired project.
The difficulty of this decision is our lack of certainty when considering the future. We know with certainty it will cost $35,000 today. We don’t know whether it was a good investment until many years into the future. A similar debate can be argued for the tariff debate today as it applies to infrastructure projects.
I admit to lacking knowledge of what it takes to rebuild or repair infrastructure. I am impressed when I build a box for the theater that turns out relatively (never perfectly) square.
A key cost of projects is the cost of materials. I know if the cost of wood increases, the cost of building my theater box increases. If infrastructure is a high priority (for both political sides), I question the timing of current tariff talk and threat. Tariffs will almost certainly raise prices for the raw materials in the near term. The question and debate are what happens in the long run. Like the annuity cost, there is a known cost today with an unknown future outcome.
I began writing this post shortly after initial results were announced. Sadly, over a week later, voter discrepancies are not resolved in multiple races.
All legal votes should be counted. The public should be protected against voter fraud and other illegal measures. Rather than agree about voting laws, both sides took to legal measures. Bottom line, voters should be given the opportunity to vote. Voters should expect a fair and transparent process.
In February of 2015, President Obama proposed a change in how retirement advisors would provide advice. He said, “It’s a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first.” You may know this rule never made it into law. Many industry participants protested the rule. Interesting, the failure to become law raised awareness. I hope recent elections bring problems (both potential and real) to light. I also hope the two sides can find common ground to put the voter’s interest first.
I don’t put much thought into the voting process. For me (and I would argue most) the voting process is straightforward. But perhaps I am naïve. I think most people assume (or assumed) financial professionals were held to a fiduciary standard or at least financial advisors wouldn’t fight as hard as they did to keep it from becoming law. With the shift in the House, we may see a return of the “Fiduciary rule” as well.
My greatest frustration in recent voting cycles is the lack of real information. The campaign for Senate in Arizona was negative on both sides. We heard very little about why we should vote for either candidate. Instead, we were shown reasons we shouldn’t vote for the other. The ads focused on the negative emotions of constituents. For me, the past two primary elections lacked substance. I hope this will change, but apparently, it works for the majority.
I often tell people the reason to hire a financial professional is not for the ability to pick the best solution for you. One of the best reasons to hire a financial planner is their ability to remove the emotion and bias from the current viewpoint. Sharing the “numbers” of a plan is one of my favorite parts in the planning process. Prior to seeing the numbers, most have an opinion based on emotion. The best part…when emotions and numbers match.
It would be nice to see all the facts when considering a candidate’s past rather than snippets of a bigger story. I think it would be interesting to have candidates list the five most important goals for their term. Then share how they plan to achieve those goals. We would have their plan. Of course, execution and goals don’t always match. We would have something from which to base our next decision…other than emotions.
We follow a similar path when reviewing your financial plan. We list a few key goals. We create a plan for how we will achieve them. Then, we revisit and adjust. We are building a process rather than an event. It might be interesting if politics followed a similar process.
Another election cycle for Stephanie
I love talking about elections with Stephanie. Elections have provided opportunities to teach her about choices. At twelve years old, she hears opinions from multiple sources. Some adults in her life are very emotional about politics. They have a predetermined answer. My question for her predetermined answer is always “why do you feel that way?” And then the real conversation begins.
When we had this discussion in 2016, her answer was often “that is what mom said.” In 2018, her answers were a little less predetermined. She recognizes she has two very different parents. I explained that I prefer to vote for people rather than parties. She thought that was a good idea.
Stephanie says…I am the crazy parent (luckily mom balances the craziness). She admits being more like me than her mother. This led to one of Stephanie’s best quotes. “People keep telling me I will become my parent. That petrifies me.” I just laughed and wished her good luck with that.
The most important issue
Based on exit polls in 2018, healthcare continued to be the most important issue for voters. It is also one of the most important issues when reviewing your financial plan.
Prior to the Affordable Care Act, many remained in the workforce because of pre-existing conditions. Today, many consider staying in the workforce (even part-time) because the private market is becoming increasingly expensive. The numbers are downright scary, especially when considering the impact inflation will have on future costs.
At some point, this must change. Projections too often show people paying as much (or more) for healthcare as they do for all other living expenses. I believe something will change, but what, how and when? There is little doubt, the cost of and access to health care will remain a key point in future elections. As laws and options change, we will update your financial plan.
As we look forward, the flip of the House will likely impact financial markets. But I don’t think this will be the primary driver of market returns going forward. Historically, markets perform better in a divided house. But we are navigating some headwinds that weren’t blowing when measuring historical impact.
We will remain diligent and adjust as we see change. As markets become more volatile, remember your plan considers bad timing. For the most part, portfolios are invested more conservatively than in “normal” markets. If you have questions about how recent events might impact your portfolio and more importantly, your plan’s projected outcome, please reach out. If you know of someone questioning whether they can withstand an increase in volatility, please share my contact information. Clarity removes the thing that often creates the biggest problem…the emotions surrounding the unknown.Have a Happy Thanksgiving.