Simply seeking to make more money is not a financial plan – a Millennial’s perspective

01/02/2019

I recall one of the first things Roy told me when I became his client a decade ago was that it was insufficient to tell him you want to retire or make money. That information is useless to him. He can't come up with a solid financial plan for a client without specific details. He needs to understand your goals and the context you exist in so that he can work backwards and come up with a plan that can actually be followed.

This sounds like common sense. Isn't it intuitive that the most efficient way to work towards something is to first know what it is you ultimately want to achieve? Yet it seems when it comes to money many often lose sight of that forest for the trees.

Over the past few weeks I've had conversations with several different groups of people on money matters. While the context and contents of each conversation were different, there was a theme that was common to all of them - how easy it is to emphasise the bottom-line in one sense, yet completely forget it in another, a larger one which is arguably more important. The recognition that money should merely be a tool to achieve other things which give meaning to your life was largely forgotten, and what specific role it should and can play was overlooked. No specific figures to achieve specific objectives were discussed, just abstracted notions of potential returns on investment which would "make more money".

I saw this in a conversation with friends about investing in cryptocurrency and the potential for huge returns. And in another with a family member who was inclined to buy a financial product from a relationship manager from a large retail bank on the basis of the generic explanation "it's a better use of your money and the returns will be higher" and the manager's (fortunately) good track record thus-far. In these conversations, there was broad acceptance that having more money and seeking ways to get it was the name of the game, and that was reason enough to aspire to have more of it. The more, the better.

This is not in and of itself wrong. Having more money can indeed give you more options in life. But there is always an opportunity cost to making more of it. A higher paying but more time-consuming job that causes your personal life to suffer? High risk financial instruments which offer the potential for high returns but whose volatility results in a lot of anxiety? And what if you end up with more money than you can spend? To some that is indeed the objective; a happy problem. But is it really happy, especially if the path to such abundance has come at a huge cost in other areas of one's life, areas which cannot be earned again like money. Time and health are often the most significant.

A better approach to adopt is to first know how much money you need and then work backwards. Simply seeking to make more money is not a financial plan. This, of course, is not easy. There are lots of unknowns in life, especially when one projects into the future. But there are ways to factor key life events in. The cost of raising children, geriatric healthcare or retirement expenditure can all be estimated and planned for. Roy has helped me think about them financially. The bigger challenge, however, is first figuring out what those events, and others, mean to you. Only you can determine that. That is contingent on you first figuring out what you, as a person, want in life. Remember, money should just be a means to an end. These questions, and other similar ones, therefore need to be answered: How do you understand work? How do you understand raising a family? How do you envisage retirement? What does "quality of life" mean to you? More importantly, what is the logic underpinning all of answers? Difficult questions will have to be asked and answered, and constantly revisited as one's life progresses.

But if you do so, you'll be able to come up with a more efficient financial plan that is focused on having enough wealth at reasonable "cost," not simply more and more money which could result in more problems too. Roy terms this "planning according to required returns." It's an idea I like very much. It's an efficient way of thinking about money because you seek to earn only as much as you need (as determined by you), and therefore pay only as much in opportunity cost as is needed to achieve that sum (the assumption here is that the process of making money requires you to put in resources which you could have been spent elsewhere in your life). No more, no less.

Above all, these questions, will help you to understand yourself better. As much as they are geared towards achieving the practical outcome of a solid, workable and efficient financial plan, the answers to these questions may help one answer the biggest question everyone faces but whose answer is so elusive - "what is the meaning of life?"