Planning By Default?

The Danger of the Sneaky, Sticky Status Quo

My father earned the Eagle Scout designation as a young man, and his influence on my own development included many values he picked up through scouting.  One example came in the form of a saying he used often: "failing to plan is like planning to fail".

In my work I often encounter people who seem to have opted into the "default" financial plan for their situation, meaning they haven't made much conscious consideration of their own circumstance, but were instead just carried along by the currents of their lives.

In cases of young professionals, the default plan may look like focusing on career development and contributing a "reasonable" amount to their 401k plan at work. (Typical exchange: Q. Why did you pick a 6% amount to contribute to your plan? A. My HR guy said that's what many of my colleagues were doing)

For some older people, a common occurrence has them realizing in their mid to late career years that they are "behind" on savings and investment planning as retirement begins to look less like a far off dream and more like a coming reality - ready or not!

Everyone chooses a plan, even if that plan is to do nothing and "hope for the best"

One real value of working with a planning professional is in following a formal process of discovering your specific goals, articulating those goals clearly, and putting actual numbers on paper to allow for making a plan.  For people who prefer to do (or at least begin) this work on their own, consider the following a "bare minimum" for avoiding the trap of the status quo.

• Take a cash flow snapshot.  For many people, the idea of a making and following a budget is thoroughly unpleasant and akin to working out the details of a new no-flavor diet plan.  The good news is that some research in cognitive bias suggests that even a superficial level of awareness of a person's spending habits can have beneficial consequences.  To that end, using a simple program like Mint.com can provide a high level "snapshot" of cash flows in and out of the household.  For even more impact, consider taking the time to do a weekly / monthly review of spending by category: "I spent how much on coffee this month?!"
• Put a simple, bottom line number on your goals.  Whether the goal is your own retirement, paying for a child's college education, making a big charitable contribution, or any number of other things, take a minute to consider the possible range of funding needed to meet the goal and pick a number.  Approximations or "guesstimates" are better than nothing, and serve as a great way to start the conversation.  For a simple approach to the retirement number, some people come up with an approximation based on their current spending "pushed forward" to retirement; others back into the number based on a set of assumed future expenses.
• Review those "default" decisions.  It is a reality of modern life than many decisions are made in a hurry or without much consideration in the moment; however, there is no need to simply leave those decisions untouched forever.  Taking a minute to review choices like 401k contribution amounts, life insurance / IRA beneficiaries, recurring spending on charities or memberships - these are the "low hanging fruit" of financial planning.  It should be a simple thing to go back and tweak these earlier decisions to ensure they reflect your actual values and intentions,

These three items are very reduced, highly simplified approach to making a financial plan for your own life.  For a plan to be effective, it may be very valuable to take a much more comprehensive approach, considering a wide array of possibilities, potential outcomes, and an intentional ranking of priorities.