Financial Geekery

The three pillars of Adaptive Financial Planning

March 10, 2019

When people hear the phrase "financial plan", they imagine a black binder full of beautiful charts and graphs and recommendations...that they'll receive, admire, put on the shelf, and never look at again. Unfortunately, that's often quite literally what "financial planning" looks like.

 

And while it may work for some, I'm not a fan of this approach. I prefer a method that I call "Adaptive Financial Planning". It walks the line between flexibility and rigor, spontaneity and intention. It's a plan that changes as you and your circumstances do.

 

A seaborn adventure

 

Imagine, if you will, navigating at sea in premodern times. The first step is always deciding where you want to go; otherwise, you're liable to get nowhere. You get out your sextant and map, plot a course, and set out. You navigate as precisely as possible -- you don't want to get lost or caught in a storm -- but even so, your sextant is only so accurate. (Not to mention the longitude problem!) You may change your mind about where exactly you want to go, or you may detour to avoid an obstacle or take an opportunity, or maybe you drift slightly off course due to wind or current. That's all fine! Because periodically you stop, take out your map and sextant again, and make a course correction. 

 

Not only that, but you're constantly scanning the horizon. Is there a storm coming? Rocks ahead? No worries; because you've got a weather eye out, you see them coming long, long before they arrive, and can batten down the hatches or change course to avoid them. What would have been a major disaster becomes a minor inconvenience. (Not to mention that your vessel runs light and with a reinforced hull, so that if a squall does come up out of nowhere, your vessel can outrun and/or weather it!)

 

A traditional financial plan is like a map showing your location at a particular point in time: useful, yes, but declining in value as time goes on. Adaptive Financial Planning is like having a fully-equipped navigator and a barrelman in the crow's nest, able to provide the captain (you!) with the information and heading needed to get to the desired goal.

 

And yes, this is precisely where Seaborn got its name.

 

So: what does Adaptive Financial Planning actually look like when it comes to money? From a high-level perspective, there are three pillars: intentionality, short-term flexibility, and adaptive long-term planning.

 

Intentionality

 

Intentionality -- purpose, direction, mindfulness -- is important in virtually every aspect of life, and finance is no exception. Adaptive Financial Planning means that you know where your money is going, and you're working to make that match your values.

 

There's no "should" or "shouldn't"; there's just "thing A is a priority, and thing B isn't". Thing A can be new shoes and thing B can be a perfectly maintained lawn; thing A can be annual travel and thing B can be retiring before 70. The point is that you are making the decision, rather than your money just sort of wandering off. No falling asleep at the tiller!

 

As you might imagine, this is where budgeting comes into play. Now, I'm not saying that you have to go all out and create a zero-based budget, though that's always a good idea. Rather, like diet and exercise, financial intentionality is a sliding scale. Some is better than none; the object here is simply to get better.

 

And to be clear: this is only partially related to spending less than you make! Tech professionals and engineers often have a winning combination of good income, a high "pain of paying", and zero interest in keeping up with the Joneses, so their money often just sort of accumulates over time. This is not intentionality! These folks have a different challenge.

 

Short-Term Flexibility

 

Mindfulness and purpose are important, but all the intentionality in the world won't help you if a threat or opportunity comes up and you're not in a position to address it. This is where short-term flexibility comes into play.

 

In financial planning, we spend a lot of time looking at the future: Monte Carlo simulations, cash flow projections, and the like. However, Adaptive Financial Planning requires that you also look at the effect of a decision on short-term flexibility, as well. Sure, maybe taking out that mortgage makes Monte Carlo happy, but will the monthly outlay cause your nondiscretionary expenses to get dangerously high? Maybe the potential upside on your employer's pre-IPO option package is great, but will buying the stock (and maybe paying taxes, especially in the case of NQSO's!) empty your emergency savings account

 

I have seen people and companies go broke simply because they didn't understand the importance of short-term flexibility. They made all the right long-term decisions, but in the end they couldn't address threats and opportunities that came up. Maintaining short-term flexibility -- running light and reinforcing that hull -- helps keep you on course in the face of the inevitable weather that will get thrown your way.

 

Adaptive Long-Term Planning

 

It's a bit of a mouthful, I know, but the wording is important.

 

First, let's talk about the "long-term planning" bit. You may think that it's not worthwhile to plan for the future -- after all, your life may be radically different in ten years, much less 40 or 50! And while you're not wrong about the "radically different" part, you are wrong about the "not worthwhile" part. By charting a course, you can make sure you're headed in the right general direction, even if you make course corrections on the way.

 

For example: you may change your mind about retiring at 65, adjusting that number up or down. And speaking of retirement, Social Security may change -- your full retirement age may rise by a year or two. Tax law may change in a major way, as it does every few decades. All these changes may elicit adjustments in your retirement contributions, asset allocation, and asset location, but just because you might change your contribution down the line doesn't mean that you shouldn't make an educated guess as to what that contribution should be! By doing so, you reduce the chance of having to play "catch up" later in life because you didn't plan earlier.

 

But let's not forget about the "adaptive" bit. Even tech professionals and engineers are prone to cognitive bias, including the "end of history" illusion. We consistently underestimate how much we will change in the future -- whether we're 17 or 70! So while long-term planning is critical, it's important to update the plan regularly. And not just when we've had a major life change! Every financial plan experiences "drift": market returns, inflation, raises, and other variables will deviate from projections, and over time even small deviations can compound until we're radically off-course! 

 

"Adaptive" also means placing a premium on liquidity, rather than locking up your assets in places you can't get to in a reasonable amount of time. In other words, it means "less directly-owned rental real estate and more real estate investment trusts", "fewer annuities and more exchange-traded securities", "less permanent life insurance and more term-and-invest". The more you keep even your long-term investment assets liquid, the more radically you can change course if needed or desired. (This is one of the reasons I love Roth IRA's!)

 

Building your adaptive financial plan

 

Ready to chart your course? Here are some places to start:

 

Intentionality: as I mentioned, it's all about budgeting. Consider reading up on cash flow management and looking into budgeting software. Remember: the best system is the one you actually use! 

 

Short-term flexibility: Check out the 50/20/10 rule -- particularly the "50" bit. Also look into how your savings accounts are set up, and ponder how you would handle a job, medical, home, or auto emergency.

 

Adaptive long-term planning: Get a sense for what financial planning looks like, and brainstorm goals for your life between now and 100. (The Seaborn Financial Ladder may give you some ideas.) Come up with a plan for getting there, and review and update it on a regular basis!

 

Naturally, while you're building your vessel and charting your course, it helps to have an experienced navigator as a guide, whether they're on your ship or consulted as needed. That's where Seaborn comes in; wherever you are in your journey, we'd love to help!

 

Happy planning, and may the wind ever fill your sails, Captain!

 

 

Britton is an engineer-turned-financial-planner in Austin, Texas. As such, he shies away from suits and commissions, and instead tends towards blue jeans, data-driven analysis, and a fee-only approach to financial planning.

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