Imagination and Reality: Fire-testing the Financial Plan
“We suffer more in imagination than in reality” – Seneca
Imagination and Reality
Psychology and philosophy have always touched on one another, kind of the same way that a tomato is a fruit but a culinary vegetable. It straddles both lines without committing. I once remembered hearing a psychologist talk about the imagination and early human beings, saying how many psychologists credit the imagination as an important survival tool, because we can simulate in our imagination how something will transpire before doing it. And while we are imperfect at it, we can “die thousands of times in our imagination so that we can live the one attempt we make,” paraphrasing his talk.
Financial planning follows the same course of action. Financial plans, when we take them up here at Emergent Financial Services, is a matter of testing a person’s financial life in simulation for the same reason: so that when they live their life, they can do so without worry and without failing to save or plan enough.
What to test?
It can be difficult to know what to test, though, when we are trying to fire test a financial plan. How does one go about it? What are the parameters of the test?
If you are testing inflation, for instance, which is a popular subject today, it’s possible to over test. It’s unlikely that inflation with rise to 10% per annum and even if it did, most of the world would be unable to survive that economic environment, rendering all financial plans (and planners) probably bankrupt.
On the other hand, assuming no inflation whatsoever would present a rosy picture that is unlikely to be realistic. Plans that would survive under no inflation pressure might easily fall apart in a real world where inflation is a concern.
Many of the things financial planners will test within financial plans are:
· Inflation
· Income
· Tax burden
· Life insurance need
· Long Term Care need
· Emergency funds, etc.
Testing the need and amount of potential need is one of the key aspects of having a financial plan. Finding flaws and weaknesses in a plan is the job of the planner so that you and your family can adjust and protect against circumstances.
Why test for things outside of our control?
You might argue that testing for factors outside our own personal control is futile. After all, we cannot control federal spending, consumer behavior, or the money supply and so cannot in any macro way affect inflation either as the devaluing of our money or in the supply and demand side.
While that is true, there are many things from a financial planning side that can be adjusted and managed. For instance, if a family’s plan were dangerously subject to inflation, they could make sure they invest in inflation-hedged assets. They could also ensure that their assets were more liquid and not too heavily invested in real estate. While real estate is very liquid in 2021 following the pandemic, it’s not unlikely that in the future, this may not be the case and one should not rely too heavily on one sector as source of income/funds.
Conclusion
In the end, we can all agree that it’s better to suffer the consequences of a financial plan failing on paper when we are able to make adjustments and protect against flaws than in reality when it’s too late.
A little adjustment now can save a lot of headaches later. And after all, a little peace of mind about our finances can go a long way.
Don’t forget to catch Today y Mañana every Thursday at 10:15 am, here, and on the iLoveCville Network! You’ll find our CEO Alex Urpí and our CIO Xavier Urpí every week there with a whole host of guests.
Until then,
I’m Nickolas Urpí
From Emergent Financial Services
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