If I gave you three oranges today and you did not add any more, how many oranges would you have one year from now?
Conventional math tells you that you would have three oranges but science would tell a different story.Those oranges would rot away within weeks, if not days.
Is your money rotting away like those oranges?
Traditional financial planners are quick to focus on how many "oranges" you will need to fund your goals like paying for college or saving for retirement.
"Planning to send your kid to college? Well, the average cost of college increases by 6% each year. Looking to retire by age 65? The average retiree needs about 70% of their pre-retirement income during their golden years."
In fact, many financial institutions have made it their business model to help you find "your number."
While financial calculations are quick, they are often shortsighted. That's because money is not math and planning is not built on averages. If that were the case, I could stick one foot in a bucket of ice and one in a blazing fire and I should feel pretty comfortable, right?
Engineers do not build bridges based on average wind speeds, temperatures or load bearings. They need to consider factors that are extreme and even unforeseen. Math cannot protect you against the unforeseen.
Financial plans cannot be reduced to a mathematical formula: Save this much, for this long, at this rate and "voila!" In the case of the oranges, math does not account for factors that will cause them to rot away like heat and humidity. It's the same with money.
Math will not account for risks such as inflation, legislation, or taxation that could "rot" your purchasing power.
Financial planning should be a process that begins with a systematic method of "protection first". Protect your oranges and your ability to add to them first. Then make sure they don't rot away.
