It is actually quite scary to make a financial plan that lasts a lifetime. There are more things we do not know than things we know for sure. Yet, I made the effort to make a financial plan to guide my actions, and guess what: it is wrong! But it is perfect for me.
My first attempt dates from 18 months ago. It was nothing more than a spreadsheet that tried to guesstimate my assets by the time I retire at age
65 67. It was very basic: a list of everything I have and what I plan to save going forward. I added some compounding interest formula and tada… a number comes out. What to do with it? Is it enough? I had no idea.
Over time, while reading more on financial planning, I started to add some more personal insight to the plan. The current result: the long term goals that I use as the basis for the planning and a plan to retire in 2029.
The simple fact that I started to think about the future made that I needed to do a few things.
A plan is an action list that tells you how to go from A to B.
So, I did the following
- Where is A?
- Where is B?
Finding A is clearly the easy part of the equation. It all started about 18 months ago. I listed everything I have and own. It took some time to find everything and log it.
Defining B is more difficult: We know a few basic longer terms goals we have. It can be resumed in one word: FREEDOM. The freedom to do what we want. Not being held back by money, a boss or other constraints. So, this is what we want to reach. Freedom is hard to enter in a spreadsheet as a comparison value. The next step is to translate this into a real number. To keep things easy for now, we go with the 4 pct rule.
Let the planning start
Now we know where we are and where we want to go, we can make a plan. By guesstimating our yearly income and expenses, we can see how much we can invest. Next to that, these investments will compound over time. The end result is my FIRE tool.
All of this sounds rational and reasonable. So, how and where is it wrong? There are many flaws in the plan.
The 4pct rule needs my future spending. I have no clue what this will be, so, I made a best guess estimate by starting from our current budget. I add some items and remove some items.
The plan needs the following years income and expenses. Again, no guarantee that the number I put on it is correct. Using the principles above and leveraging our budget, we can make some educated guess.
Yield over the next 15 years. Here I went with a conservative estimate that reflects my current low risk asset allocation.
We love to travel and will in due time do some works in the house. Let’s add this to the plan.
This plan has a lot of guesstimates, a lot of assumptions and moving parts. By just tuning one element, I can be FREE 2 years sooner or later. The yield is a good example. An increase to a more commonly accepted return brings the FIRE date 2 years forward.
How can this be an good?
I am a believer in 2 things
- A plan is above all a communication tool. It allows you to communicate a message. I use it to discuss the subject with my wife, to keep me focused and on this blog. It provides a framework to guide decisions. It allows to split the problem into eatable pieces
- A plan provides also a bench mark. It allows me to measure progress against a set number of goals. By doing regular check ups, I can see if the plan needs adjustment
- The amber index measures the progress in net worth compared to the plan. This way, there is a clear black and white input: Are we on track to our date? If not, we now we need to adjust the plan. It is better to do this in 2016 than all the way at the end in 2028. The margin for correction is just not available anymore.
- Each year, I update the parameters that go into the plan. As time progresses, I have a better view on our ongoing expenses and our expected income. We can also update the expected travel plans and house upgrades. As such, each year, we tune. Again, better now than seeing in 2028 that we might need 3 more years.
By having a plan in place that is based on best guesses, and by following up on a regular basis this plan, I do believe we are far better off than people that have no plan at all. In my opinion, they make even bigger assumptions on the future outcome of their savings. And by not measuring from time to time, they will be surprised at the end. In some cases they will be happily surprised, in other cases, they will be disappointed.
How do you deal with this incertitude that comes with planning this far ahead?
40 thoughts on “A wrong plan is better than no plan”
We’ve been there AT, and can completely relate to your conundrum. All plans and future forecasts are guesstimates. They are only as good as there assumptions and the assumptions will change over the years. I think an old Warren Buffett quote might just carry the day in this situation. He has said, “it’s better to approximately right….than precisely wrong”. Make your best guesstimate….and change the formula as new info becomes available. I’m sure it will be accurate enough 🙂
the Warren Buffet quote is spot on. Thx for sharing
A rolling stone gathers no moss my friend. Having a plan in motion is always better than doing nothing. You’re doing it the right way. you have a plan with best guess assumptions, and you visit performance on a monthly basis. So the plan will adjust overtime, but you will hit the goal as long as you measure and adjust along the way.
Thx for the visit and confirmation. I do not like to gather moss indeed!
I recommend having a plan with both short term and long term goals. Short term goals like saving for a dream vacation, new car, stuff that you may want or need within the next 5 years. Long term goals would include living debt free, paying for your children’s education and building a retirement nest egg. A financial plan is a road map to your financial future with many forks in the road. Each fork will require to pick a direction, should I buy a new car or continue to fix my old one. Take a vacation or allocate the money into your retirement fund.
Your retirement goal is the most difficult to plan. It depends on your lifestyle, will you be able to live on 70%, 60% or 50% of your current income. Your expenses should be a lot less when you retire. Expenses for your children will be gone, hopefully debt free, work related expenses will be gone, no more payroll taxes….etc
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The short term goals can indeed provide some stability to some parts of the plan.
Right now, the closest goal we have is 6 years from now. A long 3/4 week trip overseas with the kids. The travel fund is born.
I also set shorter-term goals. For example – in 6 months time I want to have paid off that loan by X. That way I can celebrate some successes along the way, which motivates me to stay on track 🙂
Amber – I was where you are almost 15 years ago. Figuring out my first “Retirement Cash Flow Plan”. Now, I’m less than 2 years to retirement. Stick with it, it works, even with the guesstimates.
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Good to read that it actually works. Good luck with the last years!
So true. I’ve been hesitant to create a more definitive plan because of all the moving parts. For one thing, I live in NYC right now and the cost of living is ridiculous compared to other areas of the United States. My girlfriend and I are looking forward to moving soon, so I’ve been placing my living expense calculations on hold until then.
But like you say, even if we move to a more permanent place, it’ll be hard to accurately guess future spending. So to that end, I guess it’s time to make a more concrete plan right now and adjust as we go along.
Sounds like a plan to me!
I think you are doing exactly what you need to do. Updating the plan and refining estimates as you progress in life and circumstance change. Keep up the good work!
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As you very rightly say : “a plan provides also a bench mark” I think that’s the whole point!
Plans are made to be changed, because they reflect your position as of today. What’s powerful is that if something changes in the future, you now have a benchmark to evaluate how it will impact your end goal.
Similarly to “a bad plan is better than no plan”, I like to say “it’s better done than perfect”.
I do the same and I guesstimate all the time. When things change, I try to stay on track with the plan by adjusting other variables. Having a plan is probably half of the work to reach your goal. You’re doing great!
Trying to adjust other variables is indeed a good suggestion. It is great help to try to stay close to the benchmark.
I think your title pretty much sums up everything the doubt you may have. It is better to have a plan in motion than no plan. Plans hold us accountable, as well as having a blog!, which will motivate you and keep steering you in the right direction. Your plan will always be revised and will probably never be perfect but at least you know the direction you want to head! Before you know it you will be closer to your plan than you know it.
PS. Belgium for Euro 2016 Champs? Not sure if you watch football but worth a shot as they are my favorite European team for years now haha.
Belgium has a good change to be EURO2016 Champs. I am not into football, except for the Belgium team. Go Red Devils
I love your approach. From a professional point of view, I see it as a ‘model’ of the real world. There are variables and assumptions you can change as you get more information, but at a single point in time, you assume ‘ceteris paribus’ which given you speak more languages than I do, probably know this means ‘all things remaining equal’. It is never meant to perfect, or complete. I also enjoy doing different scenarios since I have now built my model. #nerdalert
I put a random peg in 10 years from now to say we will be “retired” but I expect to still be earning, just not from a traditional job.
As long as you are realistic and make adjustments to hit your goal, you have nothing to worry about!
A random PEG, that is bold!
I like the non traditional job approach
Yes, I can relate to your post and the comments. When I first started looking at my finances almost 15 years ago I had no clue. I just started measuring. What do I have and what is happening with it. First thing to come was a budget for the year. And only after 3 or 4 years I started formulating ambitions. Which developed into a plan.
Life is what happens while you are busy making other plans. One divorce, a new relationship and a three year period abroad have all meant major changes to the plan. That is alright. How boring could life have become if I would have had to stick to Plan A. If Plan A fails, there are 25 more letters in the alphabet.
Sounds like you had already a few curve balls…! A good plan is a flexible plan.
There is also a lot of good learning that comes from executing a plan even if it doesn’t pan out as initially thought. Experience is a great teacher and that comes with planning.
I am having difficulties with 4-10 year plans so I feel your struggle. Great post!
Great post! I think it’s good to have a long term vision and a short-term plan.
Funny fact referring the title “A wrong plan is better than no plan”:
In his Psychology Book “The Art of Thinking Clearly” Rolf Dobelli describes that people feel less lost in a new city with a map in the hand … even if that map is of a total different city.
Great analogy.. People need some sort of big picture indeed.
I think that a changing plan is better than not having a plan. We may do the best guesstimates we can but the thing about life is not something is thrown to us that we never consider. This is why I always am open to changing and updating my budget from time to time. Some people think I’m crazy for doing this and tell me there’s no point for me to have a budget if I can stick with it. For me a plan doesn’t have to be set to stone because life is never the same day by day so why should i stick with a set plan? That’s just my two cents. I think you are doing what exactly is right for you.
ha ha ha this is great. I so agree that SOME plan is better than no plan. It’s like asking a group of friends where they want to eat. Everyone says “I don’t care” but can never decide until someone proposes a place like McDonalds and they group realizes “Any place except McDonalds”. Now you’ve narrowed down your choices. 😉
I haven’t done my financial planning yet, but maybe I need to get on this. I’m aiming for financial freedom from a boss so I need to figure out how to calculate that.
Getting free from a boss is a good goal. There are many tools out there to give you a plan. Good luck and keep us posted o your guesstimate date.
Keeping the plan fluid and flexible. We think this is the key thing for FIRE. And we know that you are thinking exactly the same! Just keep going, that is the most important thing of all.
Talking about plans going haywire, how is your running going? Will be a massive fail on the running challenge for me….although I’m still running.
IF we both fail at running, then we both win, right? 😉
I got mu knee injected with some cortisone last Friday, now waiting to see if it goes. I fear I need to limit myself to 5 or 6K. Doing more puts to much stress on my knees. I prefer to run less and till I am 80 tax to run far now and stop in 3 years.
Very wise words! I have also been held back by an old injury and Miss CF has decided to no longer go to bed at 19:00, but now between 20:00 and 20:30 (started since the time switch to summer time), which does not leave much time for running. Both held me back quite a bit unfortunately.
Hope the knee will improve soon. Still impressed that you are running 5-6k!
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A first test run is planned Thursday… I hope to reach my distance goal. Time is not relevant at this stage.
The future is very uncertain. Point B is so far away for us, that we cannot see it.
We want to do as well as we can, as quickly as we can. How big B will be, or how long it will take to get there, I’m not sure, we would want it to be as sustainable as well. We must be able to live off the income, never touching the capital. The more we can create our wealth, the more we can spend in ‘retirement’.
Indeed, the journey needs to be sustainable… Happy retirement
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thanks for dropping by at my blog. You asked about the Railroad Industry and I have made a post about it. Hope you like it.
I will check it out!thx
Congrats on starting so soon in your life with a plan. I agree with you; my parents never made any plan and it didn’t turn out well for them. Their premise is that life evolves all the time and your plan may not worth much in 5 years. Well, if you have plan, you have a benchmark as you said. This helps you tweaking your plan and keep your ultimate goals in line.
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Interestingly as I continue along my way to FI, I worry less about my future expenses – as long as I know what my expenses are now and how they’re changing over time, I can easily make course adjustments to bring them back into line. I guess this is what I was thinking when I wrote my last post about inflation.