Problems with Traditional Financial Planning

The following is an excerpt from The Other 8 Hours: Maximize Your Free Time to Create New Wealth & Purpose by Robert Pagliarini. Copyright © 2010 Other 8 Hours, LLC All Rights Reserved. The book tells people to live life to the fullest by radically changing the way they spend “The Other 8 Hours” – the 8 hours not spent sleeping or working.

There are real and serious hurdles to overcome if we want a better financial life.  What’s the solution?  Well, the solution has been traditional financial planning.  The traditional approach to financial planning is pretty simple. Take away all of the jargon and fancy acronyms, and you’re left with just three factors:

(1)  Time—need a lot of it
(2)  Savings—need a lot of it
(3)  Investment Return—need a high rate

The traditional approach only works if you have Time + Savings + Return. If you lack any one of these pieces, and the Dead Broke usually lack most of these, you’re going to have a problem.

The limitations inherent in traditional financial planning run deep and have created a dilemma. It’s what I call Sophie’s New Choice. Should I skimp and save for the next 40 years so I can then squeak by in retirement or should I enjoy life a little now and pray I hit the lottery when I retire? These are our options? The choice is as subtle as Vinny asking, “Would you like it in the head or the chest?”  But traditional financial planning has other limitations too:

• Age-related issues. You don’t have to be Dr. Oz to know that the older we get, the more health issues we face. Aside from chicken pox and ear infections, I think every other health problem increases with age. This means that during our prime years—the years when we are the most vibrant and healthy, we are working and that when we retire our health begins to deteriorate. Also, as our years increase, our energy decreases. We don’t have the same bounce in our step as we age. One retiree said, “Now that I’ve finally got the ability, I don’t have the mobility.”

• Delayed gratification. Would you rather have a cupcake now or tomorrow? If you’re like most people, you want it now. Not just cupcakes, but everything—vacations, nice cars, security, time for hobbies, travel, etc. But our choice is not today or tomorrow. It is today or 40 years from now. That’s not delayed gratification, that’s nearly-impossible-to-imagine gratification!

• Late start. One of the three key ingredients in the traditional approach is time, and to succeed, you need a lot of it. The traditional approach just doesn’t work effectively if you start too late. If you’re 22 and diligently contributing 10% of your income to a 401(k), time is on your side. But if retirement is nearing and you don’t have anything saved, you’re not going to make it with traditional financial advice. Don’t take my word for it. Use any one of the retirement calculators online to see for yourself.

• Live to work. The pre-boomers had a job. The boomers had a career. The post-boomers want a calling. Those born after the boomers want to live to work, not work to live. They want to find meaning and significance in the work they do. Trading time for money just to pay the bills isn’t attractive to these generations.

• Retirement focused. Instead of looking at ways to improve life today, traditional financial planning focuses almost entirely on retirement, which could be 20, 30, or 40 years in the future. If you’re working overtime just to pay this month’s bills, you need solutions and strategies to live richer life now, not 40 years from now.

• Expense-only focus. Traditional financial planning focuses exclusively on just one side of the cash-flow equation—expenses. What can we reduce, eliminate, or postpone? How much can you sacrifice today for retirement 40 years from now? Reducing excess and unnecessary spending is absolutely critical, but traditional financial planning neglects the other side of the cash-flow equation—income! In addition to consuming less, we should also focus on boosting our income.

The traditional approach to improving finances and saving for retirement initially leaves most Americans confused and then, when they work through the numbers, frustrated. “How can I save for a distant future when I’m struggling to make ends meet right now?”  Traditional financial planning is like measuring a mile with a ruler—it can be done, but it is very time-consuming and you’re going to have one hell of a backache. This is why so many are saying forget it and instead, are choosing to spend today and ignore tomorrow. This feels good in the moment, but it is obviously a horrible long-term financial plan.

It’s easy to point fingers when someone is clearly living an extravagant lifestyle. Just tell them to cut back, right? Even though I’ve worked with a lot of people over the years, it is still frustrating to sit across from someone who earns a lot but spends lavishly and complains about their debt and their poor financial situation. That answer is simple. But it’s an entirely different situation when you’re sitting across from a couple who are in debt and struggling but they’ve already sacrificed and cut their expenses to the bone. Where are all of the financial planners and eager solutions for that couple?

Let’s be clear, I’m a big proponent of the traditional approach. I am a Certified Financial Planner.™ I have a Master’s degree in Financial Services. I am the president of a financial planning firm. I wrote a bestselling book based on the traditional approach. It can and does work. You should cover the basics and implement the traditional strategies to improve their finances, but you must temporarily forget about all of the traditional financial advice you’ve ever read or heard because it will prevent you from getting the life you want, and it will make you ineffective and frustrated.

Imagine you’re driving a car. Traditional financial planning advises you to conserve gas regardless of how uncomfortable or how much longer it makes the ride.  Of course, if that doesn’t work, you’ll be forced to choose a closer and less desirable destination, whether you like it or not. 

The assumption is that you’ve got a limited supply of gas so you have to make it last as long as possible. It doesn’t matter if it’s 100 degrees out and that you’re dying inside the car.  If you can drive a little farther by having your windows rolled up and your AC off, then that is a sacrifice you must make. The focus is on stretching your existing resources as much as possible, regardless of the sacrifice involved.

Traditional financial advice focuses on depriving, reducing, cutting, and eliminating. All the financial experts are hell bent on getting you to cut your expenses by shrinking your lifestyle. They want you to take your big goals and dreams and shrink them until they are shriveled and unrecognizable.  Stretching your resources is a good idea, but when the entire focus is on conservation, getting by, and making do, you lose the capacity to identify opportunities. Think about it. If you’re so focused on the dwindling gas gauge, you may not notice the six gas stations you just passed.

Fortunately, you have the other 8 hours.  In the coming chapters, you will learn a completely different approach. Instead of focusing all of your attention on how to stretch the limited gas you have, the goal will be to find a gas station so you can fill up. Do you see the difference?  You will learn to focus on your potential and what you can accomplish instead of on only what you currently have.

You want to grow, expand, achieve, and experience, but traditional rules tell you that you need to reduce, contract, and limit our life. I will show you how to jump out of the box you’ve been crammed into and to expand your means to fill your vision instead of shrinking your vision to fit your means.  

The other 8 hours are the best resource you have to radically improve your life and finances. The other 8 hours is time. Time you can invest to produce a bigger and better future than the present. Your first step to reclaiming your life and your finances is reclaiming your time—getting more of our 8 hours back and getting more out of them.

Comments

[DJ]

There seem to be two separate camps within the finance blogosphere. First, the frugal, cut back and save until you reach your goals camp. Second, the earn more money so you can support whatever lifestyle you desire. I like the intent of this article because it sees to blend the two camps, which has been a positive trend recently!

Being frugal and not spending money on frivolous items and clutter is a wise move, but coupling that with being industrious and earning extra money on the side will really skyrocket you towards your goals.

[BillV]

For me, I don't see it as an either/or choice. Maybe the issue come from defining frugal. it doesn't have to mean stingy, cheap or tight. Lord knows I have "wasted" money in my life--but, always within my means. What I mean is that you can save for the future and still have that cupcake, just not the whole box at one sitting. I lived well, not lavishly, but within my income level. I paid myself first, so I felt free to spend what ever I wanted to spend as long as it was debt free.

What I like about the article is that it seems to me to suggest tath you can enjoy today and still prepare for tomorrow. Scrimping is not required if you can afford not to scrimp. One doesn't have to shop at the day old bakery, always buying clothes at the second hand store (not that there is anything wrong with that), and living a monk style life.

Moderation in all things; including moderation. Anyway, it worked for me.

[Sarah]

This is so true and it is nice and refreshing to hear from a financial planner!

[Paul Williams]

DJ, to me this article doesn't seem to combine the two views. It seems to be another book completely focused on the income side of things. No, he doesn't come out and say frugality is bad. But look at this paragraph:

"Fortunately, you have the other 8 hours. In the coming chapters, you will learn a completely different approach. Instead of focusing all of your attention on how to stretch the limited gas you have, the goal will be to find a gas station so you can fill up. Do you see the difference? You will learn to focus on your potential and what you can accomplish instead of on only what you currently have."

Sounds a lot like all you really need is to focus on those other 8 hours and how you can increase your income.

I'm in agreement with what you said, DJ. The best solution is both approaches. But I don't see how the excerpt from this book aims to marry the two.

[Old Limey]

You can follow all the best advice on saving money, living frugally, and investing wisely but unfortunately there's much more to it than that. During your highly productive working years you need the cooperation of an economy that provides steady employment, reasonably low inflation, and a rising stockmarket.

I have a very large wall chart of the market averages from January 1970 until July 1991 and a very comprehensive fund and market index database that goes from September 1988 until the present time.
What it shows are long periods such as 1970 through the middle of 1982 where there were four small waves but no significant upward progress whatsoever. From mid 1982 there was a nice upward movement that culminated in a huge selloff in October 1987 called Black Monday. By 1991 that damage had been repaired and between 1991 the market took off in the best sustained move it has ever had. This move brought about by new technological advances continued upwards sharply until March 2000 when the "Tech Bubble" burst and the market came crashing down. By October 2007 broad markets such as the Wilshire 5000 had recovered but the Nasdaq (home to most Tech stocks) never did. Then in October 2007 the markets started a freefall that by March 2009 had wiped out all the gains of the prior 10 years.

My income producing years were between 1956 and 1992. When I retired in 1992 my portfolio was a decent size but it consisted primarily of the money I had contributed (with a company match) over 32 of those 36 years, the appreciation was not very large. With that alone and the two retirement checks and two Social Security checks our lifestyle would be not that much different from what it is today, mainly because home prices were so low in the sixties and seventies. What made the huge difference to our portfolio was riding the Tech Bubble upwards from October 1998 and selling in March 2000. In that 18 month period the Nasdaq 100 gained 306%, the Nasdaq Composite gained 256%, and the Wishire 5000 gained 61%.
Conclusion - Out of a working life that spanned 36 years, the gains from just one great year, 1999, was equal to the sum of my gross annual salaries for the last 32 years. That's why I do not believe that Buy and Hold is capable of making you wealthy. I also believe that it is very difficult for most workers to devote the time that it takes to practice comprehensive fund selection and sector rotation while you are busy working in an important job that consumes most of your waking time, and by the time they retire, without nice pensions, it may be too late.
I was never in management, the highest level I attained was a senior staff engineer to a manager and leader of a very small group performing R&D on new software. I guess that if I had risen through the ranks to where several hundred engineers were reporting to me and had received company profit sharing I might have done as well without the help of the stockmarket.

[MasterPo]

While it's a good article, you're lumping all financial planning under one big umbrella. That isn't so.

Sure retirement planning is a big issue. But you can also go to a FP for college planning, disability planning, asset protection/transfer planning etc.

[Terry]

FINALLY - a PF author who speaks to me!

[Terry]

This is great, the more I read, the better it gets!

[MV]

> "Gratitude unlocks the fullness of life, turning what we have into enough, and more. It can turn a meal into a feast, a house into a home, a stranger into a friend. It turns denial into acceptance, chaos to order, confusion to clarity. Gratitude makes sense of our past, brings peace for today, and creates a vision for tomorrow." -- Melody Beattie

> "That man is the richest whose pleasures are the cheapest." -- Henry David Thoreau

> "If you look at what you have in life, you'll always have more. If you look at what you don't have in life, you'll never have enough.... The more you praise and celebrate your life, the more there is in life to celebrate." -- Oprah Winfrey

[Terry]

So let me see if I've got it straight:

If you have a poverty-level income, gratitude unlocks the fullness of life, and turns what we have intoi enough? It doesn't pay the bills, so what if you have a family to support or children to leave an inheritance?

I'm really big on frugality, but even frugality won't solve everything, and I don't see how gratitude will either. But I cannot be sure of that; someone is working on changing my mind.