“Everything should be made as simple as possible, but not simpler.”

Albert Einstein

For most of my adult life, financial planning was one of my least favorite things to deal with. I used to feel that I was swimming in information and was apprehensive regarding the potential for making bad decisions. Recently, however, I’ve become intrinsically fascinated with this domain and enjoy delving into it. The reason for the change is that I’ve recently run across some approaches to organizing business as well as personal finances that make it possible for virtually anyone with common sense to understand them in novel and useful ways. 

When I ask the business owners that I work with what issues are most responsible for keeping them awake at night, the two most common answers are: (1) their ability to organize financial plans that will best secure their long term futures, and (2) concerns with profitability.   

The second one, maximizing profits, I’ve always been comfortable with. A long-term student of the performance of business organizations, I’m on home turf with issues associated with that end of success.  Long term financial planning, however, has always been another matter. 

I’ve always been content to defer to professionals whose specific training and experience are more purely focused within that domain. To me, financial planning per se was a necessary and irritating evil that I would prefer to leave to others.

Common fears and frustrations

I’m not alone that way. People representing a staggering array of income levels, professional training, and degrees of net worth often express bewilderment when it comes to issues related to wealth management. It’s complicated, includes myriads of possibilities, and it’s really easy to make errant decisions. The fact is, most people have trouble developing a mental map of the best route success and have a lot of difficulty getting a good handle on the process.

Developing a viable financial plan is itself an exercise in managing complexity, chaos, change, and risk. The pressures associated with it create uncertainty and stress that affect much more than one’s fiscal status— they can degrade one’s quality of life and even physical health. 

Complicating factors

The human brain came about in simpler times, and hasn’t changed much over thousands of years of human history. The world of finance that it has to respond to has — and rapidly. Consider the array of factors that affect the consequences of our financial decisions. A quick review of some of these explains why most people feel overwhelmed:

Market volatility: IRAs and 401Ks grow and shrink with ups & downs in the market. Millions of people have watched their plans for a secure retirement dashed by the economic downturn. The unpredictability is frustrating and often frightening. J. Pierpont Morgan, financial genius of the early 20th Century, when asked about what the stock market was likely to do, responded, “The market will fluctuate.” Not comforting news.

Lack of agreement among experts: Note any televised discussion among financial experts, and the most consistent thing you’ll run across is disagreement, frequently heated. One of the more successful independent financial planners I know was once told by a representative of a big firm that his business model would doom him to failure. He’s doing great. Another one, who’s enjoyed a lifetime of success in that area, insists that “There are no real financial planners; there are only mutual fund salesmen.” Others I’ve spoken with completely disagree with this view. Apparently there are a lot of ways to get it right— and doubtless more to get it wrong.

Self-interested financial professionals: While many financial advisors do put their clients’ interests first, there are also many professionals who seek to maximize their own fees, billable hours, and commissions, playing upon the confusion and uncertainty of those they purport to serve.

Managing risk: Countless people have suffered financially because of unforeseen events, such as accidents, illnesses, lawsuits, or loss of employment. Sound financial planning needs to take some of the most unpleasant possibilities imaginable into account, which isn’t easy to do.

Inability to see the forest for the trees: With so many details “in your face,” grasping the big picture can be very difficult. Yet that is exactly what we need to be able to do. What most of us really need is some way of backing off and seeing the totality of what we’re dealing with in a way that simplifies, but does not lose, the realities and options we’re dealing with.

Simplifying the picture

For most folks, financial information is usually in quite a fragmented state. It tends to be scattered across different accounts and institutions, and generally involves multiple advisors who don’t communicate with one another. The big picture is difficult to get a handle on, but recently I’ve run across some intriguing means for doing so.

There are now a number of web-based tools that give clients access to their entire financial picture in one location, while preserving the realities necessary for managing the future intelligently. While they certainly don’t eliminate the need for financial advisors, they simplify the picture and empower more “ordinary” thinkers to view money matters in a coherent way. The understanding and confidence that some of these convey empowers them to take greater charge of their futures.

Coherence out of chaos

One such tool that I’ve become enamored with, called “The Living Balance Sheet,” allows its users to reduce their financial information down four interrelated “domains” for analysis:

Cash flow: This includes all sources of income, which of course is the foundation for building wealth.

Assets: The dollar value of what we currently possess: IRAs, 401ks, the value of our businesses, real estate, or anything else that we own that might be converted to cash.

Liabilities: What we know we’re going to have to pay out:  Mortgages, credit card debt, loans, taxes, or any other outstanding accounts receivable that we’re responsible.

Protection: Property, health, life, casualty, and any other type of insurance we carry to manage the risks that we all face in life and business.

These four categories of course contain subdivisions, but when combined into a single big picture of our financial situation, what emerges is a simple, but powerful “mental map” of what would otherwise appear to be chaotic and extremely difficult to get a handle on.

Applications and advantages

The real advantage of this particular organizational scheme is that it is designed to make the interrelations between these four categories of financial information easy to explore for decision making purposes. The one mentioned above, for example, automatically generates “net worth” by subtracting liabilities from assets. The interplay between net worth, cash flow, and protection can then be readily examined, since all of these are available for easy reference to one another.

It also allows its users to make projections regarding net worth down the line, by plugging in various values to create future financial scenarios. In a world in which digital technology is so often misused, this tool gives us access to useful information regarding where we currently stand relative to where we like to be in both the near and distant future. Its real virtue is the ability to realistically compare and contrast various means for getting where we want to go.

Protecting your financial future

Most important is that it conveys the ability to generate “what would happen if” questions regarding the good, bad, and ugly things that can happen to any of us, and actually get answers. The old adage, “Hope for the best, but plan for the worst,” is designed into its workings. A tool such as this allows us apply that principle in ways that few of us would have been capable before.

The ability to understand the importance of right kinds of insurance protection is the real key. Most people hate dealing with matters related to insurance, but once you have access to a big picture of your financial standing, it becomes much easier to see where it fits and how it can be leveraged to your advantage. It can be used in creative ways that are rarely discussed and often neglected, but only if you are able to regard it in the context of your finances as a whole.

Reducing taxes and fees

Another real value of aggregating your financial data in one location for analysis is that you’ll be surprised at the options you’ll discover for reducing the amounts you pay out in taxes and brokerage fees over the course of a lifetime. Depending upon your income, the amounts that you can save could easily range from tens of thousands to millions. 

It’s estimated that most people could easily have 30-40 percent more wealth available to them in retirement than those who use more traditional approaches to planning, but are simply unaware of that fact. What has surprised me is that there are a lot of financial advisors who are still operating by more traditional principles, sticking to the turf with which they are most familiar. Paradigm shifts in any area of expertise generally tend to be slower than we might expect. 

Seeing both the trees and the forest

Uses of digital technology range from those that genuinely improve our lot to those that are “dumbing people down.” When used intelligently, digital tech conveys incredible advantages that can improve our quality of life. I find that it’s use for organizing fragmented and confusing financial information into a coherent whole to be among the more sensible uses. 

In a world that grows increasingly overwhelming in its complexity, I appreciate those applications that make us better decision makers by helping us to see order in what otherwise would appear chaotic. Recent years have been especially tough for business owners and individuals to figure their ways through the maze of financial “solutions,” many of which often turn out to be anything but that. I’m pleased to run across a trend that is making things simpler and more manageable.