Broker Check

Three Question for a Better Financial Life

May 01, 2017

The economist Thomas Sowell says that when considering the value or lack thereof in any policy, plan or premise, you should ask three questions. Compared to what? At what cost? What hard evidence do we have (supporting the premise)? It struck me that these questions can aid us in our evaluation of future planning.

1- Compared to what?

We can only choose what is available and known to us. We should do this keeping in mind that no choice is perfect. Our choices merely provide tradeoffs that might create advantages. Moreover, the worthwhileness of what we do can only be understood in context and in hindsight.

Don’t believe me? Ok think about this: If you could choose to have a billion dollars tomorrow, would you? You might. However, I’m willing to bet that choice wouldn’t seem appealing if you knew it would ultimately lead you to owing two billion dollars and facing years in prison.

Again, the point is that things are only good, not so good, or bad, when considered in context. Therefore, when we ponder a course of action, we should train ourselves to consider the question, “How good is the course of action I am considering taking compared to other possibilities?” This is the “Compared to what?” question. A financial planning example might look something like this:

Let’s say a person has $100,000 in cash, earmarked for long term investment. Consider, that it is earning next to nothing in the bank. The prospect of putting that money in the stock market isn’t appealing to them because there is a substantial risk of loss. This person doesn’t like real estate because there are no guarantees there either. Additionally, they do not want a part time job tending to tenants and maintenance in a rental property.

Hmmm, perhaps, fixed income or fixed income like savings plans might provide a solution.

In today’s interest rate environment their rate of return might be in the 2-3% range. That’s not exactly a bonanza, but that $3,000 in income generated on their investment would be ten times more than the $300 they would be making at the bank. Sure it would be wonderful to get a 5% interest rate at the bank and FDIC insurance to boot. Of course, we have not seen that type of interest rate, at banks, in years.

We have to make the best decision we can in the world as it is, not as we wish it to be. To make our best decision we can adopt the habit of asking ourselves- “Compared to what?”

We can then review the other options available to us, compare them with a course of action that we are considering, and choose that which best fits our needs.

2- At what cost?

Every single decision we make in life is a tradeoff. In other words, the true cost of whatever we do is everything else we could be doing at that moment. Economists call this the opportunity cost. Consequently, even a free lunch is not free. The cost is what we could have been doing while eating that lunch.

In the incredible time we live in today, that’s quite a lot. When we turn left at a traffic light it is to the exclusion of the other roads we could have taken. When we are at work, we can’t simultaneously be at our child’s recital, ballgame, or a backyard barbecue. If we watch television, we might have chosen it over reading a book. If we are reading a book we might have chosen it over a seemingly infinite number of magazine articles and online news sites.

In addition to all the options we might consider, when making a decision, there is one additional possibility to consider. We can always do nothing. We don’t often think of doing nothing as a choice, but it certainly is and its cost might be the greatest of all. If I read a book, the cost to me is all of the other things that I could do with that time. At least, however, I read the book! And that counts as one worthy thing done.

If we do nothing, that’s nothing done. So, in a counter intuitive way, doing nothing may well have the highest cost of all. It costs us those things we could have done, in a life that is anything but infinite.

At times, some good folks I work with in the planning process may initially feel more comfortable with not taking action than with taking action, even when they agree that taking action is in their own best interest. You might be wondering why. It is because even though they believe they need to be taking action, doing nothing, at least initially, seems more comfortable. It allows them to maintain their status quo – even when they know they desperately need to change that status quo.

Thankfully, at least in my experience, most of these people take the action they believe they need to, after overcoming the emotional – not logical – desire to not take action.

When considering a well thought out plan, one that you have spent time working on, you should ask yourself “At what cost?” However, also be sure to compare it with the cost of doing nothing. Sadly, some folks will find out later that the cost of doing nothing was too high.

3- What hard evidence do we have?

I tend to be skeptical by nature. Because of that, I need to see proof and evidence to base my decisions on. When it comes to planning for the future, though, that can be difficult.

It’s difficult because, as the character Yoda – from the Stars Wars movies – said “Constantly in motion is the future.” Because we don’t know exactly what will happen in the future, or when, we can’t plan for it with exactitude. Therefore, we must accept that “hard evidence” regarding what will happen in the times ahead is impossible to come by.

What we have in abundance, in place of evidence, is precedence. We can use history as a guide for our decision making. I do not believe that the past repeats itself exactly, but as I once heard it put, “It rhymes.” In a broad sense we tend to see certain sets of circumstances come up again and again. The cyclical nature of life is not so fixed that we can make predictions, but it is fixed enough that we can develop certain expectations.

By reviewing historical data and overlaying it on the data of today, we might be able to gain greater insight into important financial events that have the power to shape our world. Some of this data might include:

- Income tax rates

- The ratio of the national debt to GDP

- Social security and projected shortfalls

- Medicare and Medicaid liabilities

- Estate tax rates

- College costs

- Long term care costs

- Personal savings and debt rates

The list goes on and on. In considering our third crucial question of, “What hard evidence do you have?” It seems that the only hard evidence, if you can call it that, is related to the past. That may just be our best guide to being prepared for an uncertain future.

Create an actual plan. Compare your plan to available options and then take responsible action. If you like, consult a financial planner that you trust.

Scott R. McGimpsey May 1st, 2017

This material was prepared by Scott McGimpsey and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources, however, we make no representation as to its completeness or accuracy. Neither Summit Brokerage Services Inc. nor Scott McGimpsey is engaged in rendering legal, accounting, or other professionally services. If such assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any federal, state, or municipal tax penalty. Moreover, a diversified portfolio does not assure a profit or assure protection against loss in a declining market. UNIFIED PLANNING GROUP is an independent firm with securities offered through Summit Brokerage Services Inc., Member FINRA, SIPC