Financial Planning as a Decision Making Framework
This week I wanted to explore financial planning as a decision making framework and how it can provide a vital role in focusing priorities in the near and long term. Financial planning provides a framework to make decisions through the lens of financial security as well as proper allocation of resources. This does not mean that capitalism and money are the end all be all, but with finance playing such a prominent role in our lives and relationships, utilizing financial planning as a decision making framework can help put you in a better spot when you encounter tough situations in life. This framework allows us to work with the hard numbers that make up our financial situation, which can help remove a lot of the emotion and anxiety from the decision making process. Just because we focus on these numbers does not mean we leave out the personal impact that these decisions have, it simply shows the values of every decision. However the biggest hurdle most encounter when thinking about financial planning is “getting life figured out first” as they feel they have too many decisions in front of them to take advantage of financial planning. So, if you have ever thought you have too many decisions or big decisions to make before you engage financial planning, then this is for you.
Let’s start with having big decisions that are getting in the way of financial planning, as that seems to be more frequently the case. The most common situations that I have encountered have been a big spending decision such as buying a house or other large expenditure or a job change. Now, I completely understand being preoccupied with making this type of large decision and not wanting to spend time on something you may see as extraneous to the process of moving forward. It is easy to get immersed in the process and screen everything else out until you have made the decision and moved beyond your choice. This can be especially true with large decisions, but the ability to place them all in the same context regardless of how different they may be can be an incredibly valuable tool for weighing the importance of each choice. For example, let’s deal with the job change first.
There is generally so much more that goes into making a job change than just a salary or a company/location difference. Say you have finished residency and have been working at a hospital for the past few years, and the opportunity arises to start a private practice. I understand how faced with this decision you would not immediately think “I need to turn to financial planning to figure out what makes the most sense here” as there’s so much involved with this choice beyond retirement and investments which is what most people believe a financial plan addresses. However, financial planning used as a decision making framework can be very powerful in cutting through to the heart of what this decision means for you. Perhaps you are currently using PSLF (Public Service Loan Forgiveness) to pay off student loans and have been doing so for the past 6 years. Moving to private practice would kick you out of that program as you need to put in 10 consecutive years (120 monthly payments). Now, maybe the new salary will offset that loss of student loan repayment (a quick look at some of the numbers can be found here) but does it still make sense to move?
Weighing benefits versus salary can easily be done through financial planning, and can provide some insight you may be overlooking. “But it is not just salary and numbers that I’m concerned about, I want to create something/have independence/have a more flexible schedule” I can hear you saying, which is also a critical component to making big decisions. These decisions almost always contain some element of seeking a better life in some way, whether that is more freedom from work or being able to work the way you feel best fits you. This situation is perfectly tailored to financial planning as it gives you the opportunity to weigh all options equally. Again, I am not saying that money is the most important factor, but this framework allows us to find the common denominator for each option and compare apples to apples instead of apples to oranges. Once that has been done, we can explore options that will get you to those goals, and that includes whether it makes sense to move to a private practice now, or wait a few years.
Regardless of your situation, by taking a step back and working through these decisions via the framework of financial planning can provide some incredible insight and provide an answer you may not have gotten otherwise. Perhaps you had not anticipated the other parts of running your own business and do not want to take on that amount of stress at this point in your life. In many situations like buying a house or taking a new job, using financial planning may actually make the decision for you as allows all decisions to be weighed on the same scale, no matter what decision you are facing. This can help you avoid buying too much house, or taking a job that puts you in worse shape than the one you left.
The other issue people face is that they have a bunch of smaller decisions to make and get overwhelmed with that process. Similar to the process of big decisions, the financial planning framework allows you to weigh all options on a similar scale. This is especially helpful for a lot of smaller decisions as it can be very difficult to figure out which decision to attack first. By looking at all of them through the same framework we’re able to see the importance of these decisions as compared to the others and will allow us to effectively prioritize the decision making process. Obviously every person is different and therefore encounter different decisions that they need to make, but it’s the value of seeing all these decisions weighed on the same scale that allows for better decision making and less stress overall.
There is incredible value in financial planning, even when life seems too busy and hectic to deal with adding another thing on your to-do list. By taking a step back and taking the time to plan can be valuable by itself, but especially so when you are able to place all options on the same scale. Using financial planning as your decision making framework allows you to take much of the emotion out of the decision making process and look at the actual numbers behind each option. This process will give you a clearer picture of what makes sense as a way forward. If you are interested in learning more about the financial planning framework or you want to start using it to make decisions please reach out to me and we can get started.