(As published in March 2016 SMART BIZ)
Now you understand the financial industry and how to use it even while taking responsibility for your own financial priorities (December 2015). You have established your cash flow, keeping it positive, (January 2016) and made your RRSP contribution (February 2016). We now turn to the day-to-day, year-to-year management of your income and expenses towards your goal of financial independence.
I have spent a lifetime in the study and practice of management. The essence of managing comes down to three words: Plan – Direct – Control.
The first step in planning is to pick a destination, specify a goal. You have already been doing this, deciding what you want to be when you grow up. Taking responsibility for keeping your cash flow positive was a big step. You now evaluate your alternatives so that you can then allocate your scarce resources to best serve your priorities. The first was debt repayment, then came saving, including managing risks. Only after those did we allocate income resources for food & shelter, while saving a little for fun even if we had to live in a smaller place or drive an older car. That allocation was “Planning”.
You then made decisions about expending your income cash flow for maximum benefit within your allocations. This is the action or “direction” phase of managing your money. You give directions to financial professionals to manage risk and grow your assets.
That brings us to the third task of the manager, whether for an enterprise or for your (financial) life. How do you “control” that your directions are achieving your plans? This third task of managing is the most often neglected. You must measure the results being achieved by the execution of the plan to be sure it is in fact achieving the objective you set, on the schedule you expected. You cannot manage what you do not measure. This data from your measurement of results is then the foundation of further planning, then issuing corrective directions to move closer to your targets.
The navigator during the voyage or flight, measures where the “craft” actually is by taking a fix of the position (using independent, corroborating information). Differences from the planned position may be due to many factors, from the wind for the navigator to unexpected expenses messing up your budget. The navigator then calculates the actual wind that put him where he is instead of where he planned to be, so that he can issue corrective directions to the pilot to get back on track to reach the destination as planned. A business manager’s quarterly results may be less than she projected due to economic pressures, competitor initiatives, higher input costs – or maybe she just made some mistakes. She can then analyze the causes of the variances from the planned budget and amend the plan to achieve the year end goal. There is also the option to adjust the plan expectations; the original goal may not have been realistic in the circumstances.
You need to do the same in your financial planning. You make allocations of your scarce resources to pursue certain outcomes. Regularly measure if you are achieving the desired results, if you are indeed where you planned to be by that point. If you find a target missed, you can address “why”. It may be that you blew the $300 mad money budget by the $200 great deal on the new outfit that was on sale at your favourite store. That’s all right, you do not need to give yourself twenty lashes of recrimination. Simply recognize the problem and take corrective action – like foregoing some concert tickets next month so that you still pay off the high interest credit card by the due date.
Plan, Direct and Control and your financial planning will be perfect, right? Sorry. The real world is messy. You may find yourself planning and directing and controlling in different spheres at the same time – job, family, finances. And the environment on which you based your assumptions will change like the wind, requiring new corrective actions. But however messy the real world becomes, keep the basic model in mind to keep you on track, more or less.
Most of us expect the manager’s job is to maximize some goal such as profit. In fact it is a balance, to meet the profit target while avoiding going broke. Investing is the same, to make a return without losing the principal. Management is like juggling. The objective is not to throw one ball as high as you can, it is to keep several balls in the air at the same time.
Managing your life or your cash flow will be a dynamic business affected, and often blown off course, by the winds of life. Understand that your plans may need to change, as will your directions, on this journey we call life, but keep controlling your destiny by measuring your progress, making corrections along the way.
In the end the destination was not that important. It was the journey. Be sure to enjoy it.
Fredrick Petrie, author of “THE END OF WORK: financial planning for people with better things to do”, practices financial planning at Mortgage Logic, 1793 Portage Ave., Winnipeg, MB. (204) 298-2900
In making trade-offs, distinguish your goals as Needs or Wants when choosing between priorities in your spending. You can also make trade-offs related to quantity and/or quality. I might “want” a twenty dollar bottle of wine but my “need” for a glass of red with my dinner may be 95% satisfied with a ten dollar bottle. I make a game out of trying to find a $10 wine that is comparable to a $20 bottle. Most people select their wines by grape variety or country/region. I like to shop by foreign exchange. When the rand is in the tank, South African wines can be a deal. With the euro down, many French wines became more affordable, and when the Canadian dollar was high, I was even drinking Californian.