Hi Reader,

This might be an odd way to think of it, but if we wanted to establish a mathematical-looking formula for financial success, I think it might look something like this:

(Capital x Time x Quality of Planning Decisions) x Quality of Behavioral Decisions

Let's review each piece of this equation in turn.

But first,

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Capital & Time

It's intuitive that supplying our financial plans with enough capital (money) and time is required to achieve financial success, so I will be brief on these components. The simple math is that the more capital we put toward our plan, the less time should theoretically be required to achieve our goals. And the more time we give our capital to compound, the less capital should theoretically be required to achieve our goals. This is a pretty straightforward calculation.

But here's the thing. What your capital and time will ultimately amount to hinges dramatically on the quality of your planning and behavioral decisions. Let's start with planning decisions.

The Quality of Your Planning Decisions

Planning decisions are the decisions we make together when we build, review, and update your financial plan. They include decisions about your portfolio's asset allocation, how to best utilize debt, addressing the spectrum of tax-planning decisions, planning for short-term risks via insurance planning, plus many others.

Barring significant life changes, these broad planning decisions rarely require a complete overhaul. Still, it's always important to remember that each planning decision impacts both the capital and time required.

As one example, making a planning decision to be volatility-averse is making a conscious tradeoff that your plan will likely require additional capital or delay the realization of your financial goals (i.e., require more time).

As is evident here, these first three components all interact relatively seamlessly. Just like 1x3x2 and 3x2x1 both equal six, so it is with these components. While each is independently important, additions in one area can often offset deficiencies in others. Unfortunately, this is not the case with behavioral decisions.

The Quality of Your Behavioral Decisions

Early in our financial lives, each of us likely made a few poor behavioral decisions (e.g., trading hot stocks, timing the market, etc…) without causing significant harm to our long-term future. But later in our financial journey—or after we've accumulated significant capital, regardless of age—poor behavioral decisions can completely derail even the best-laid plans.

In this way, the more money you have and/or the older you are, the more of a binary effect these behavioral decisions can have on your plan. At least as far as the equation goes, they generally equal either 1 or 0, which has important implications.

I'm guessing you probably remember from grade school that any number multiplied by 1 is the original number and any number multiplied by zero is zero. This being the case, good behavioral decisions are rarely additive (meaning our success is governed by the first three components of our equation, as it should be), but poor behavioral decisions can make achieving financial success nearly impossible.

In other words, every bit of saving, time, and planning can be rendered irrelevant in the wake of a single poor behavioral decision. Some are less dire, but the point here is that it doesn’t take much to undo decades of prudent financial management.

What makes good behavioral decisions particularly difficult to make is that behavioral decisions are made—good or bad, and consciously or unconsciously—every single day. Thanks to the 24-hour news cycle that's built on the provocation of fear and/or greed, we must stay on our toes if we are going to consistently make good decisions.

Not surprisingly, this is why I continuously encourage you to focus on your plan, regularly meet with you to review said plan and write these notes to you. Because I know what's at stake and believe that this combination is the best way to encourage high-quality behavioral decisions that are the linchpin to your ultimate success.

I hope you find this to be a helpful approach to staying the course toward your most cherished financial goals!

Then, hit reply to this email with any questions. I read and respond to every message. 😃

Keeping Retirement Simple,

Eric Blake, CFP®

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