Have you made any mistakes with your money? If so, I have some good news for you: Financial planning is, at its core, an exercise in mistake management, and failure is far from fatal.
My friend and colleague, Heather Fortner, the CEO of SignatureFD, a financial advisory firm that manages about $7 billion for roughly 1,700 individuals and families, found herself at a parenting crossroads. Her five-year-old daughter, Oakley, was exhibiting intense anxiety around anything that involved competition.
“If she didn’t think she could do something perfectly, she wouldn’t do it at all,” Heather told me. Recognizing the potential danger around her daughter’s perfection paralysis, she set forth on a collective endeavor with Oakley on which they’d be sure to fail.
“I wanted to ensure that I would fail repeatedly, so I chose the hardest thing I don’t know how to bake—macarons.”
Failure Never Tasted So Good
Every Saturday for four consecutive months, Heather and Oakley baked macarons. They did everything—bought the right mixer, followed the instructions, watched all the YouTube videos, and even had a private session with a professional. And in all these baking sessions, did they ever get them right? “A couple of times.”
But that wasn’t the point. In addition to some irreplaceable mother-daughter bonding time where Heather noticed she learned as much from Oakley as she imparted, they learned how to fail well. And that is precisely what we can learn from a mindful approach to financial planning. Here are four specific ways that we can fail well with our money management:
1. Budgeting and Cash Flow
FLOW
Yet, while the purpose of budgeting on the surface might appear to be an attempt to keep our spending within certain parameters, I submit that the real power of this practice is accommodating for our expected errors.
It’s the ultimate exercise in “mental accounting,” divvying our single paycheck into several different buckets, and there are three ways that we can plan for mistakes in this practice. The first is to course correct. I populate my budget monthly, but track it weekly; therefore, if I’m overspending in a particular area, I can rein in spending in the subsequent weeks.
The second way to accommodate for failure in budgeting is to reconcile your budget at regular periods. Again, I do this monthly (with the aid of my long-time favorite budgeting software, YNAB) by backfilling the holes in categories with a deficit with the surpluses in other categories. But the real mistake magic of budgeting is ensuring one of those buckets is labeled “Buffer,” or something like that so that when you don’t have sufficient surplus to cover all the deficits, you can dip into your plan-to-fail Buffer category.
(Yes, I know, budgeting sounds tedious, but imagine for a moment the peace of mind of knowing where every dollar is for the relatively small investment of 30 minutes per week and $99 per year for the software.)
2. Investing – One of this year’s sub-headlines in the investing landscape has been about the relative “narrowness” of the stock market’s performance. For example, as of late May, the S&P 500 was up pretty big at 8% on the year, but more stocks in the index were down than up.
And while everyone in the investment commentary world always wants to paint an “it’s different this time” picture, the fact is that this is more the rule than the exception in investing. For example, “of the 14 major market tops between 1929 and 2000 inclusive, when the DJIA reached its absolute peak, the average percentage of stocks also making new highs on that day was 5.98%.”
Tony Welch, Chief Investment Officer at SignatureFD, calls the phenomenon “skew.” Welch says, “Stocks exhibit what we would call ‘positive skew,’ so you end up with a bunch of stocks that are really no better than t-bills but a few outliers that give you your returns.”
It’s a phenomenon that is even more pronounced in smaller stock asset classes than in larger ones, leading us to the fascinating conclusion that most stock market gains are made by a minority of the stocks you’re likely to hold. Therefore, you don’t have to pick all the winners; you just have to effectively diversify to ensure that you’re holding that minority of winners who make up for the majority of gains.
3. Insurance and Risk Management – This one likely comes as less of a surprise, but we buy insurance precisely to accommodate for the cost we’d be unable or unwilling to bear in the case of mistakes that, however unforeseen, are surprisingly predictable. The key to failing well with insurance, though, is to position yourself as a risk manager, rather than a purchaser of every insurance policy available.
A keen risk manager will thoughtfully determine which risks they will assume, reduce, and eliminate before transferring risk for a fee to an insurance company. A good rule of thumb is to manage the risks you can afford to handle and transfer the catastrophic risk you can’t.
4. Estate Planning – And perhaps the best way to fail well in personal finance is to effectively navigate the ultimate loss—that of our lives. We may understandably prefer not to ruminate on our very demise, but when considering that they are the most important love letters we’ll ever write, crafting a customized will, durable power of attorney, and advanced directives may just be the most important part of every comprehensive financial plan.
“It’s ok, Mom—they might not look perfect, but they taste good.” Those were five-year-old Oakley’s words after the first 10 or so macaron “failures,” as her view of success, failure, perfection, and progress morphed right before her mother’s eyes.
No, failure may not be the goal, but as an inevitability, it is best planned for rather than feared.
Comments are closed, but trackbacks and pingbacks are open.