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By Darren Coleman
Special to the Financial Independence Hub
In a serial circuit when one light bulb goes out, all the lights go out. Each light is wired to the next and all of them have to work for each one to work. In a parallel circuit all the lights are wired together but independently from each other, so when one light goes out, the other lights still stay on.
This concept is important and comes into play in my book ‘RECALCULATING – Find Financial Success and Never Feel Lost Again’. The book applies the analogy of driving to investing and financial planning. (See earlier Hub blog on the book).
I have spent almost a quarter of a century counseling clients about their money and assets, and often see people who believe their financial planning should look like a serial circuit. They think they must achieve one goal before moving on to the next. They have constructed an order or sequence that must be strictly followed for them to feel comfortable about achieving their plan.
This is the view Marvin and Jesse had when I met them. A successful, professional couple, they had young children and a list of goals. No. 1 on the list was that they wanted to be mortgage-free by age 45. They also wanted their kids to go to a private school, and vacations every year with the family. In addition, they wanted a comfortable retirement by their late fifties. They had great jobs, were disciplined savers, and figured they should be able to achieve all these goals. But they didn’t know how to put all the pieces together and make it happen.
I reviewed the situation to gain an understanding of their current state, and discovered that almost all their uncommitted cash flow went to pay down the mortgage. There were only token amounts being saved for their children’s education, family vacations, and retirement plans.
A couple that used serial financial planning
When I asked about this, they said paying down the mortgage as quickly as possible was the central assumption – the core pillar – of their financial planning. In short, this couple looked at all their desired destinations as if they were part of a serial circuit. Once they had paid off the mortgage, they would move on to the other plans.
I told them they could do this, but achieving that milestone of being mortgage-free by age 45 meant they could not put their children in private school, take annual holidays with the family, or make tax-advantaged contributions to their retirement plans. So, while they could be mortgage-free at an early age, they would not accomplish their other goals. And, of course, they couldn’t get the time back.
None of us can.
Shift to financial planning in parallel
I showed them that changing the picture from a serial circuit to a parallel circuit might be the answer. If they dialled back on mortgage payments and reallocated some funds to their other goals, they might achieve everything they want. But the mortgage would be paid off a bit later. Now they would be mortgage-free by age 50, not 45. However, this would still be before their planned retirement, they would educate their children how they want and enjoy all those trips every year.
After reviewing our estimates and projections, they decided our plan would give them a richer, more satisfying journey. They would have better balance in their life by doing a little bit of each part of the plan rather than focus all their efforts on each part, one at a time.
In ‘RECALCULATING’ we look at the various types of financial goals you can plan for: Destinations, Waypoints and Milestones.
Destinations are the major goals you work towards. They are painted in broad strokes and you may never reach them.
Waypoints are stopping places on the journey to your ultimate destination. A waypoint is the thing you want to see, do or achieve along the way.
As you move from waypoint to waypoint, you need to track your progress. By identifying key Milestones, you can keep moving in the right direction and see how far you’ve come and how far you still need to go.
In the book we also address the Paradox of Choice. What’s this? It means recognizing that more is often less. When we are confronted with so many competing financial options and demands, our feet stop moving and we tend to freeze so we can’t make a decision. This is where having a workflow to prioritize, separate and analyze each option is part of the Recalculating process.
As I said in my last blog, you can’t be a passenger in your own life. Life is not a race. How you travel matters. Your journey really IS your destination, so grab the wheel and take command!
See you on the road.
Darren Coleman is one of Canada’s most successful investment managers and one of the few who is fully licensed in Canada and the United States. His book ‘RECALCULATING – Find Financial Success and Never Feel Lost Again’ is available on Amazon and at https://www.recalculatingwealth.com.
