Why Long-Term Financial Plans Usually Don’t Work Out – and Why That Doesn’t Matter If You Plan Smartly

Let’s roll back the clock 20 years…

Twenty years ago, I was enjoying the summer between high school and college. During that summer, I would go on my first date with my wife, though we would not become an official “couple” for another year or so. I was really apprehensive about going to college in the fall, as I was the first person in my family to do so. I spent some of the time during the summer helping my father with his fishing business, but I also spent a lot of it reading books and playing basketball and spending time with my high school friends. My biggest dream for the future, according to my journal at the time, was to study math in college and meet a smart girl that I could have good conversations with.

What about 10 years after that?

Ten years ago, I had recently secured my first really stable post-college job. While I had a job before that, it was on really tenuous funding and thus I was only signing a series of short-term contracts to stay there. Since my project had done well, some long-term funding was secured that enabled me to sign a permanent contract.

I was married to Sarah at this point and we lived in a tiny apartment. We had one infant child. I had just started to become aware that our financial state was awfully precarious, with lots of student loans and credit card debt stacked up around us. My main social activity was going out fairly regularly after work with some coworkers for drinks. I still read a lot of books at this time, but I also played a lot of video games and watched a fair amount of television. My dream for the future at this point was that I might someday publish a novel.

What about today?

Today, I work in a completely different field – I’m a writer that works from home. I have a long-term contract that fills up most of my writing hours, though I take on some gigs outside of that contract. We live in a house, not a tiny apartment, and it’s in a different town than before. We now have three children, all of which are in elementary school – we decided to have all of our children in a tight sequence. My main social outlets are community service, board game nights (both in the community and at our house), and dinner parties with friends. I still read a lot, but I have almost no time left over for television any more. My dream for the future right now is financial independence.

If you look at the 10-year time slices of my life, my life changed radically during each of those periods. I went from being a full-time student to a full-time researcher to a self-employed writer. I went from living with my parents to living in a tiny apartment with my wife in a different state to living in a nice house with my wife. I went from zero kids to one infant child to three school-aged children. I went from having zero debt to having tons and tons of debt to having zero debt again. My big dream for the future went from studying math to writing a novel to being financially independent.

Everything changed, in just 10 years.

This makes me ask a few obvious questions.

First of all, with such big shifts at every 10-year mark in my life, why would I assume what my life will be like in 10 years or in 20 years? I honestly don’t know what my life will look like at that point. I probably would have never guessed what my life would be like 10 years in the future at either one of those points.

Twenty years ago, I would have probably predicted I would still be single and I would be pursuing a Ph. D. in math 10 years down the road, which was way off base.

Ten years ago, I would have predicted that I would still be at that stable and steady job and that my wife and I would live in a much different place than where we live now. Again, this was way off base.

I could make a guess as to where I want to be 10 years from now. I think I’ll still be writing, but perhaps in a different genre. We’ll have just one child at home and he’ll be getting ready to leave the nest.

In 20 years, I think Sarah and I will be effectively retired and traveling around the country in a camper, but I’m even less certain of that than I am of the 10-year prediction.

The truth is that I really have no certain idea about where my life will be 10 years from now, let alone 20 years from now. I have some goals and some things that I want to have happen in that time, but, obviously, plans change. If the last 20 years have taught me anything, it’s that the plans you think you have in place can turn on a dime.

This brings us to a very big question…

Why Plan at All?

If plans constantly go awry and we have no real idea of where our lives will be 10 years from now, what’s the point of planning for the future? Why plan at all?

There are several reasons why planning is still incredibly valuable, even in the face of such uncertainty.

First of all, a good planning process makes you think about your values, and the more in touch you are with your values, the smarter your choices are when things change. If I look back to where I was 20 years ago and 10 years ago and compare those situations to today, I notice that there are a few key things in common. Family is at the center of all of them. Reading and learning remain a constant part of my life. A small circle of close friends is also a piece of the puzzle, as is a certain work ethic and desire to improve myself.

I can tell that I value those things deeply because they’ve been a constant part of my adult life through all of the changes. Family. Reading and learning. Close friends. Hard work. Self-improvement. Those things have always been with me and they’re so close to the core of my being that I can be pretty sure that they always will be with me. I can rely on those things as part of my future planning.

Second, a good planning process doesn’t lock you into a specific path; it expands your future options. As you make future plans, you should be asking yourself whether or not each plank of that plan expands your options or locks you into a particular path. In virtually all cases, you should give preference to planks that expand your options or at least give rise to a wide array of options upon conclusion.

Third, a good planning process for long-term goals gives birth to really useful short-term goals that also expand your future options. If you create long-term plans that match up well with the other criteria mentioned here, then those long-term plans should spawn all kinds of short-term goals and projects that you can invest your time and energy into to produce results on a much smaller timescale. I’ll get into the details of this a bit later in the article.

So how do you build financial plans (and life plans, for that matter) that have this kind of flexibility built right into them? I’m glad you asked!

Building a Smart, Flexible Financial and Life Plan

The goal of any smart and flexible long term plan in life is to preserve the flexibility you know you’re going to want while facing the unknowns in life while also building a good future that’s in accordance with the values you hold dear. Your future is not going to go exactly as you envision, but a good plan will roll with that and still keep you on course to achieving your dreams, even as your dreams change.

Here are some of the tactics that form the backbone of such a plan.

Spend Less Than You Earn and Watch Your Net Worth Rise

This simple maxim should be behind everything you do, regardless of your values or your goals. If you’re not spending less than you earn, then you’re simply devouring every resource you have and not building anything for the future.

The simplest way to figure out if you’re spending less than you earn is to add up all of your assets – the value of all of your accounts, the value of your home, the value of your cars – and subtract all of your debts – your student loans, your mortgage, your credit cards, your car loans. The resulting number is your net worth. It should be going up each month (for the most part) and should definitely be going up each year.

Simply put, the higher your net worth is, the more financially flexible your situation is. Your goal should be to make that number go higher and higher and higher, month after month, year after year. You can do that in a number of ways…

Pay Off Your Debts

One of the best ways to make your net worth rise like a rocket is to pay off your debts as quickly as possible, starting with your highest-interest debts. The reason is simple: The lower your debt balance, the less you’re paying each month in interest. That means there’s more staying behind in your checking account. You can, of course, use that money to make those debt repayments go even faster.

The effect that eliminating debt has on your net worth is astounding. Not only is your money no longer “leaking away” in the form of interest, it’s also not disappearing just to pay off the balances. Instead, you can use that money and invest it to actually earn a return on it. Paying off debts accelerates your net worth growth, in other words.

Buy Reliable Things and Be Careful About Consumption

Spending falls into one of two categories: either you’re spending it for consumable things, after which you’ll have nothing at all to show for it but the memories, or you’re spending it on things that you’ll hang onto.

When you’re buying something that’s to be consumed – food, drink, experiences, and the like – give it a second thought before you drop that dollar. When the experience is over, what are you going to be left with? Is that really worth it? Sure, some experiences are worth it, but many are not. Figuring out where that line really is can save you a ton of money.

Similarly, when you buy something that you’re going to hold onto, consider how long that thing is going to last and what resale value it might have at the end. It’s worth spending a little more to get something that’s a lot more reliable and a lot more efficient. Take light bulbs, for instance: a LED bulb costs more, but it’s far more efficient and will last far longer than an incandescent one, so it’s cheaper over the long run.

Invest Without ‘Locking Up’ Everything

One of the great balancing acts of modern investing is whether or not to “lock up” your money in a tax-advantaged account that’s geared for a specific purpose.

A great example of this is a 401(k) plan. When you take money out of a 401(k) at retirement, everything’s peachy – you just pay normal income tax on it. However, if you take the money out before retirement, you’re going to pay an additional, very stiff 10% penalty on top of the normal taxes you’ll pay. You’ll end up losing a significant portion of what you’ve gained, in other words.

That’s why it makes sense to diversify your investment choices. Just as you would do with your most precious belongings, don’t throw everything in the same lock box. Put some money in your 401(k), sure, especially if your employer offers matching funds, but also put some money into a Roth IRA and even perhaps into an ordinary investment account. Have some money in a cash emergency fund, too. That way, no matter what happens, you’ll have resources that you can touch without penalty, but you’ll also have some nice tax benefits when you hit retirement age, too.

Always Think About Your Core Values

Whenever you’re making decisions in life, spend a moment to reflect on the things that have always held true for you throughout your life. You’ll find that making the choice that incorporates those things the best is almost always the best choice for you.

Uncertain as to what those key values are? Do like I did earlier in this post. Look back at your life five years ago, 10 years ago, 20 years ago. What elements do all of those pictures have in common? What parts of your personality have stayed true? What interests?

Things that last for a significant portion of your life – or perhaps all of your life – stick around because they’re tightly tied in some way to a key part of who you are as a person. Keep those things in mind when you’re making choices along the way and you’re going to make good ones.

Use These Things to Feed Smart Short-Term Goals

The best part about forming a financial plan with these key principles in mind is that they all point you toward smart short-term goals – things you can be doing right now to improve your financial state. Here’s a nice checklist.

Maximize your “gap.” At the end of each month, consider how much money you earned and how much money you spent. You should be making as many choices as you can to maximize the difference between those two numbers. I find that figuring out my “gap” during a month is a spectacular way to keep myself being honest.

Snowball your debts. Take all of your debts and line them up by interest rate, with the highest interest debt coming first on the list. Make a minimum payment on every debt on the list, but make the biggest extra payment you can on whatever debt is on top of that list. When it’s paid off, cross that debt off the list and keep moving. You’ll find that this progress builds faster and faster and faster as you go until one day you wake up debt free and with a ton of extra cash each month with which to invest and build whatever future you want.

Execute frugal projects. Air seal your home. Install a programmable thermostat. Install some ceiling fans, too. Learn how to do basic repair work when it crops up, like fixing a toilet problem on your own. All of those things are going to save you money over the long run, but they do require some work right now. Commit that time and effort – don’t just kick the can down the road.

Sell off unused stuff. Dig through your closet and sell off everything you haven’t used in the last year or two. Have a giant garage sale, or sell items online or on Craigslist. I recommend selling the most expensive items individually and then selling the bulk of your collections – like your DVD collection – in a big bundle.

Start a side gig. A little side business never hurt anyone. Whether it’s reselling garage sale finds, starting a YouTube channel, writing a book, selling real estate, or whatever else you can do in your spare time, a side gig can increase your income and also provide work for your idle hands which might otherwise find themselves up to no good, spending your money.

Prepare seriously for your next career steps. What steps can you take right now to prepare yourself for promotion within your career path? What can you do to maximize the number of possibilities going forward in your career? Maybe a new career path is better for you. Maybe it’s something as simple as taking some classes or earning a certification. Whatever it is, take that step.

Shore up your key relationships and build new ones. No matter how independent you might view yourself as being, you likely rely upon a handful of key relationships in your life. Family members, spouses, children, old friends, close associates – those are the people at the core of your life. Don’t let those relationships wither. Keep them strong. Relationships are like a fruit tree – give them some loving attention and they’ll bear fruit for the rest of your life.

Keep the Possibilities Wide Open

Some people may read this article and be frustrated that I’m not telling them exactly how to invest or exactly what to do next with their money or their career. There’s a big reason for that – well, two reasons, really. First of all, I don’t know who you are or what core values you hold dear. The other reason is that this type of planning is intentionally vague moving forward.

In both cases, the purpose of all of this is to maximize your possibilities going forward so that you’re able to handle whatever happens in your life and switch directions with those changes. You don’t know what your life is going to be like down the road; all you know for sure are the core values you hold dear and some basic smart principles for your money, like spending less than you earn and investing the difference.

In the end, those are the most important things you need to know. When you start getting too specific with your financial plans, you often back yourself into a corner where you have to continue along a certain life path to get all of the value out of it. I know enough to realize that I would not want the person I was 20 years ago making major life or investment decisions for me now; I wouldn’t want that person from 10 years ago to really do so, either, other than maybe save for retirement and spend less money.

Instead, I’d merely want those past selves of mine to do things with their money that maximized flexibility and gave me the maximum number of possibilities right now. That’s what I’m trying to do today for my own self down the road, and I hope you’ll do the same.

Spend less than you earn, bank the difference, get rid of debt, and stay flexible. You’ll never really go wrong.

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Trent Hamm

Founder & Columnist

Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.