“Do you know where you’re going to, do you like the things that life is showing you?” This was the song performed by Diana Ross in the 1975 film Mahogany. It’s a question that so many of us ask about our finances: do we know where we are going? There is so much information to be considered and decisions to be made about our immediate, medium-term and long-term goals.
There are many approaches to financial planning, including planning focused on life stages and a product-based method. A bottoms-up approach may focus on how much you can afford to save or invest, or, alternatively, what kind of return you would like to achieve from a particular investment. This kind of planning may rely on a formulaic method, including your age and income, to determine what your strategy should be.
A more robust model for financial planning is the top-down or holistic approach. From this perspective, the planning focuses on your values, experiences and goals. Rather than making assumptions about your situation, the holistic approach considers your unique attributes and objectives. Financial planning involves weighing the rewards, risks and tradeoffs of decisions, clearly, objectively, without fear or favour. If you are confident that your financial planner is presenting data in a way that puts you, the customer, first, then you won’t be worried that inappropriate products are being flogged for a fee.
Planning for a long-term goal, such as retiring in a sunny climate, can be combined with deliberate steps you are taking for practical projects like buying a house, starting a business or saving for your child’s education. Visualising how your savings and investment choices will succeed in different economic scenarios can help guide decision-making. Understanding the tax treatment of different asset classes and pension schemes is important. Insurance options to protect against business interruption and income loss can be evaluated. There are tools available, but most are limited to one area of financial life, such as your pension, your mortgage or your insurance coverage, and few have the ability to see the big picture as well as identify individual risk preferences.
The ability to calculate different scenarios of insurance coverage, investment income, earnings associated with full-time, part-time or self-employment and other variables is critical for people, with the help of their financial planners, to make intelligent choices about their futures.
After inputting data about your actual and expected earnings, expenses and risk awareness, you and your planner can forecast investment choices and asset performance, using a scenario calculator. Our financial calculation engine, OutRank, presents a variety of scenarios with decision support for discussion.
How can you trust the accuracy, objectivity and usability of any financial planning tool? It shouldn’t be a black box. We take the mystery out of financial planning. Transparency is part of our values, so we employ a methodology based on utility theory. This is a careful, measured approach that, unlike portfolio theory, reflects the risk of financial decisions more accurately. You can run your data through an economic scenario generator, a balance sheet simulator, or a cash flow generator, along with financial decision support.
Succeeding in life is a combination of following big dreams and taking small, incremental steps each day. Managing our finances doesn’t have to be overwhelming, but can be an empowering experience in which we learn how to make the right decisions for ourselves and our loved ones. You can make your dreams a reality with holistic financial planning.
Song credit: Gerry Goffin, Michael Masser
Lyrics © Sony/ATV Music Publishing LLC