As someone who regularly helps people with their personal financial planning, I’ve come to expect the same old question from my mentees, a question that seems sensible from their perspective but falls short of the mark.
Let me address this once and for all, personal finance is an intricate symphony of the personal and the financial. Personal finance is, in fact, more personal than finance itself.
It’s no wonder that even in this day and age, where we are drowning in information overload, people still find themselves making non-obvious money mistakes that could cost them a fortune.
They cling to the belief that personal finance is all about crunching numbers, unaware that the real magic lies within the enigmatic realm of human behaviour.
Don’t take my word for it, but turn to the wisdom of Morgan Housel, the unparalleled maestro of finance writers in our generation-
”Personal finance is more about behaviour than it is about math. It’s not what you know that matters, it’s what you do.”
Let those words sink in as we get ready to address the question you all have been asking wrong.
What do they ask?
As I delve into exchanges with individuals newly venturing into the investment wonderland, there’s a recurring question that echoes through our conversations.
Their aspirations for financial freedom and the allure of compounding naturally lead them to a seemingly logical conclusion: to amass generational wealth, they must set their sights on one pivotal goal.
And so, they pose the question that often graces our initial encounters in my Money Mastery Program:
“How will you assist me in maximizing my returns?”
It’s no surprise that many are drawn to the simplicity of the compounding formula:
They swiftly realize that in order to maximize the ultimate value, A, their focus should be on r, the rate of return.
But here’s the twist: are they correctly identifying “maximization of A” as their ultimate financial objective?
Why is it wrong?
There’s often a preconceived notion firmly entrenched in the minds of new investors that the pursuit of maximizing A, the ultimate wealth accumulation, is the holy grail of financial success.
However, let’s take a moment to unveil the truth:
This assumption doesn’t always align with reality
Allow me to clarify, so there’s no confusion. I understand the allure of witnessing our investments soar, with the net worth numbers on our screens climbing ever higher.
The satisfaction of monetary success is undeniable, and the desire to accumulate wealth can be addictive.
Yet, it’s crucial to recognize that this obsession with “maximizing wealth” represents only a fraction of the true essence and significance of financial planning.
It’s akin to seeing just a solitary leaf while ignoring the vast, flourishing forest.
It’s time to shift our perspective, look beyond the narrow confines of wealth accumulation and uncover the greater purpose that underlies the act of financial planning.
What should they ask instead?
When it comes to financial planning, it’s essential to shift our focus from the pursuit of maximizing returns to a more holistic approach that encompasses our overall financial well-being.
Consider this: What if we reframed our perspective and asked –
“How can I achieve financial health?”
This question opens up a world of possibilities, allowing us to explore a range of financial goals, which include but are not limited to:
- Wealth accumulation (obviously!)
- Dream Vacation Abroad
- Higher Studies
- Luxurious Car
- A roof above your head
- Financially supporting your family
You get the gist.
Each goal brings its own set of intricacies, time horizons, and sensitivities.
Acknowledging this complexity, it becomes evident that the notion of achieving all these aspirations by merely maximizing returns is naive at best.
Financial planning requires a nuanced approach that considers your specific goals, risk tolerance, timeframes, and personal circumstances.
A Case in Point: Aligning Investments with Specific Goals
Imagine you have set your sights on pursuing higher studies that require a substantial corpus of $100,000 within the next 15 months.
This represents a short-term goal with minimal flexibility and a high degree of sensitivity to your life situation.
In this scenario, the stakes are undeniably high, and there is little room for error when it comes to managing the funds earmarked for this goal.
If you were to adopt a rigid mindset solely focused on maximizing returns in the time frame (15 months), you might be tempted to invest in assets that appear lucrative at first glance—cryptocurrencies, NFTs, or microcap stocks.
However, such investments may not align with the liquidity and capital protection standards necessary for your specific goal.
You simply can not risk your college education in the hands of digital tokens and penny-sized companies that can easily fall prey to market manipulation mayhem.
It becomes clear that adopting a one-dimensional perspective of return maximization would lead you astray in this situation.
Instead, a prudent approach would be to seek out investments that may not offer the highest returns but are optimally suited to help you achieve your goal effectively, a balanced mix of fixed-income securities let’s say.
Final Words
It is of utmost importance to internalize the profound nature of personal finance as a deeply personal and intimate journey towards achieving our financial aspirations.
Each goal is unique – so must be it’s solution!
Achieving them will not be possible if you approach it from a monochromatic mentality of solely increasing your returns.
The sooner you understand it, the better it is for your fiscal fitness.
By understanding and embracing the complexities of personal finance, we empower ourselves to make informed decisions, paving the way towards fortified finance.
This article is for informational purposes only. It should not be considered Financial Advice. Not all information will be accurate.
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