Thursday Thread: A Case for Habits-Based Financial Planning

You do not rise to the level of your goals. You fall to the level of your systems.
– James Clear

First, A History

Financial planning, and more specifically, the process of financial planning, has not always looked the same. In the 50 years of its existence there have been several ideations of what relevant advice looks like. As the decades have rolled on, and the financial landscape of the world has become more complicated, the focus of excellent financial planning has been forced to adapt.

And rightly so.

Retirement-Based Financial Planning

At the industry’s birth, one of the relatively new problems to solve was…retirement. From before the 1935 Social Security Act, to the widespread use of investment accounts, our country built into its culture an expectation that after a certain age, you would cease to be gainfully employed, sailing off into the distance. This was the goal to achieve. That hunt is still alive and well today, with trillions of dollars invested for the day you become “financially free.”

And so, retirement-based financial planning was one of the first areas of expertise to catch on.

People began to pay good money for a professional to answer questions like, “When can I retire?” or, “What will my lifestyle look like when I retire?” But these questions were difficult to answer when a planner did not know exactly what was under the hood.

Comprehensive Financial Planning

The questions forced a financial planner’s attention onto more than just asset values and growth rates over time. Now, things like current cash flow, taxes, estate planning, and market downturn impact all came together in what we call Comprehensive Financial Planning, or for the purposes of this post, financial planning based on your entire financial situation, not just your investment structures. We moved from products to process. From transaction to transcendence (ok, that last one was a bit dramatic). But it was still all pointing to one main goal: Retirement.

With the dawn of the internet, a transition from analogue to digital reinforced a seemingly innocent behavior trait: instant gratification. Then the 2000 dot-com bubble and 2008 financial crisis wreaked havoc on people’s long-term saving psychology. As a country, we did what most do after life-altering events…reconsidered our confidence in the future, turning our dreams and wallets away from a prescribed horizon and towards our current moment.

And so the packaged idea of retirement lost some of its luster. People began to ask the questions:

“Do I really want to work myself to the bone for 40 years only to hopefully enjoy my money when I am in the last quarter of my life? Why can’t I use my money for smaller ‘goals’ in the meantime?”

Showing someone a projection of their finances 20 years from now, while still useful, did not provide the same confidence spike, or peace of mind, for a person’s financial future. So, we adapted again, and started giving attention to all the little goals along the way.

The Current Focus of an Adaptive Financial Planner:

Goals-Based Financial Planning

One of the most robust consumer desires in existence today is customization. And a client's personal goals, whether big or small, fit just small enough inside the box.

But this recent transition came with one of the most loaded questions an advisor could ever ask a client: “So…what are your goals?”

We have now spent the better part of a decade obsessed with our goals. Our short-term goals, our long-term goals, our stretch-goals, and our “low-hanging-fruit goals.” Barnes & Noble has exploded with goal journals. Of course. People love to pontificate on their endgame(s).

But here’s the problem, it is REALLY difficult to tell someone what your goals are. Can you even answer that question precisely (Another reason why we have such a robust discovery process in our current Ambient planning relationship)? This is a person’s financial WHY. Yes, I know you want to pay off all your debt. But why? So that you have more cash flow? Why is that important to you? We get there eventually.

A side note on goals...

Ok, so maybe you can answer your WHY…Do your goals address the fact that your mind will probably change within the next 5 years, and about 25 times again before you even consider leaving the workforce? What does that mean for your financial decisions now?

I have yet to hear someone say, “one of my financial goals is to build a life where my desired outcome can be dynamic, changing with me, and I won’t be financially ruined.” (Please be the first!)

Goals-based financial planning is our current reality. It has matched our complicated financial world, to recognize that people are actually building towards something personalized that they want, and not just running on the hamster wheel.

Values-based financial planning has also risen in popularity as people want their financial plans to match their non-financial convictions. So, getting from A to B is now getting from V (values) to G (goals).

But I did not write 700 words just to explain how we got here. I cannot believe that financial planning is done adapting. No, in our post-pandemic recovery mode there is something else bubbling up. Maybe it has been there all along. But the chaos of our world is requiring us to narrow our focus yet again. And when you see statistics like $30+ trillion will be inherited from boomers over the next decade (or whatever those wild numbers actually are…yes, they are real), I am all for my profession digging into the core of the human/money experience. Here is my idea...

Habits-Based (or Systems-Based) Financial Planning

When I first came into the industry, people were already bucking the idea of the "60-page financial plan." For those of you who have never received this, it was a binder of analysis and recommendations for a client to take home that made their financial future feel..."heavy."

The problem was not that these were being produced. Since it is fairly scientific at its core, there are hundreds of numbers and assumptions that go into a personal financial plan.

The problem was that the next day, the client’s life would change. Or worse yet, the client’s mind would change. The binder becomes a bookend or collects dust in the archives.

The most recent pandemic forced every living generation to rethink their expectations. Not about everything, just about some of the more crucial topics. Like, if the rug can be ripped out from under me that quickly, why am I delaying the enjoyment of my life?

Moving from a person's values and current financials (V) to their different goals (G) is great, but what about the journey in between?

The art of financial planning must drill down into something more core to a person than their values and goals. Although those are pieces to the puzzle, it must address the decisions that they deal with on a daily basis, otherwise the planning will be forgotten, ignored, or replaced by the countless other pseudo-advisors that float our ad-driven world today. It must address HABITS.

Think about the number of financial decisions we made in the past year with footnotes like:

“This is only a one-time thing”

“This is the last time”

“I can go back and change this later”

You show me your past financial decisions and I will show you your current financial habits.

I love what James Clear, the author of Atomic Habits (see the quote at the beginning of this post) has to say about habits when it comes to personal finance:

Your current habits are perfectly designed to deliver your current results.

Ok, so we aren’t talking about 20 years down the road anymore, or even 5. At least not directly. We are talking about today. We know your V's, we are learning your real G's, but how do you live on the road in between?

Habits-Based Financial Planning, implemented by vetted advisors and planners, who understand psychological decision-making and its trending impact, will be a game changer for personal finance.

And the era has indeed already begun. If you do not address habits in your financial planning, you fail to understand whether your trajectory aligns with your hopes. And effectively self-identifying your financial habits and their impact is near impossible. Another reason why "financial advicing" as a profession will be more valuable, not less, in the days to come.

Everyone has financial habits. Even the most “hands-off” people still make the same decisions over and over again. And small decisions, repeated over long periods of time, have the power to financially alter an entire generation, if not multiple.

My hope is that as our world trends towards complication, and not towards simplicity, there will be a population of everyday people that harbor self-awareness and self-control with their money. And regardless of how much a person can access, the money matches the story they hope to tell.