Clarity – The cornerstone of financial health

When I started writing my book, The 7 Pillars of Financial Health, I asked my financial planner what, in his view, was the biggest challenge that his clients experienced. He thought about the question for a very short time and then answered with one word: Clarity.

Now you might think that this is obvious and that it is the reason you would consult a financial planner. After all they are the experts in money, and in a sense you would expect a financial planner to have greater clarity about money, and what you should do with yours. But this is not what my financial planner was saying. He went on to tell me that people often don’t know what they want from their lives, never mind their money.

Often financial planners ask clients what goals they want to set, so they can decide what to do with their money. Yet surprisingly few people have clear goals for their lives.

What does your goal entail?

The simplest of goals may also not be as simple as one thinks. For example, “I want to save for my child’s education” is a goal that many people have. But the nuances of this goal are numerous. What school do you want your child to go to? Private or state? Co-ed or single-sex? Are you including tertiary study in that goal? What will your child study and where? Will they live at home or away? Each of these questions has different implications for the saving strategy for this goal. And so often goals like these are considered in isolation of one’s overall financial and lived reality.

I know that when I was growing up my parents could only afford to send my siblings and I to a government school. There was no choice. And they made it clear early in our teens that they could not afford to pay for us to go to university. If we wanted a tertiary education, we had to plan to fund it ourselves, through loans or bursaries. Given my parents’ overall financial position, there was a limit to what they could give to the education of their five children.

What does life after work look like?

Another “simple” goal would be, “I want to retire at 65”. Seems simple. All you need to do is save enough. But how much is enough? What does your retirement look like? Where will you live? What will you do? Importantly, how long do you think you will live? What does retirement mean to you? Do you want to stop working completely, or will you still be able to earn some money? We know that having a purpose and healthy relationships are key to longevity. How does achieving both fit into your retirement plan?

A long-running study by Harvard University into happiness has focused on the biggest challenges that people face in retirement. You might think that the biggest concerns they found would be about things like having enough money, being able to afford health care and having access to care in later life.

But in fact, the number one challenge people said they faced was being unable to replace the social connection that sustained them during their working life. It’s no surprise then that the leaders of the research in fact suggest, “to retire happy, invest in your relationships now”.

This means that if your goal is not just retirement, but a happy retirement, it’s important to think about what relationships you will invest in to achieve your goal. So, setting a retirement goal for age 65 is not just about the financial investments you will make to give you enough money on which to retire. In fact, one financial planner told me that his wealthiest client is his unhappiest client. Which brings us back to the importance of clarity.

You need clarity first

You need clarity about what you want from your life, before you start worrying about clarity on your money. You can have the best-performing investments in the world, but if you are lonely, they are unlikely to bring you much comfort.

The recognition that the need for clarity in one’s life is critical for effective financial planning has led to the growth of life planning as an activity integrated into more traditional financial planning. There are financial planners now who will do life planning with their clients before they even discuss the money.

If you go through a process of life planning, you have the greatest chance of getting clarity about what you want from your life. There are different approaches to life planning. Mitch Anthony, founder of Return on Life (ROL) Adviser highlights the importance of considering your past, your present and your future when you think about what you want from life.

He believes it is important to recognise the influence that your personal history has on your life and money decision-making. He points out that we all go through as many as eighty transitions in our life – some predictable, some not – and it is important to try and plan for these transitions as much as possible when you think about your future.

Three fundamental questions

George Kinder, founder of the Life Planning Institute, suggests that to get real clarity about what you want from your life, there are three fundamental questions that can help you. The first question challenges you to imagine that you are financially secure and have enough money to take care of all your needs now and in the future. The question is, how would you live your life? Kinder suggests that you should not hold back in answering this question, articulate your dreams, and describe a life that is complete and rich, and that is your ultimate life.

Kinder’s second question stems from a visit to the doctor, who tells you that you have five to ten years to live. The good part is you won’t ever feel sick, but you won’t get notice about when you will die. The question is then, what will you do in the time you have left to live? In answering the question, you are challenged to think about what you would change in your life and how.

The third question also stems from a visit to the doctor. This time the news is a shock. You are told that you only have one day to live. The question this time, is what did you miss? In thinking about this question, you may think about things that you didn’t get to do in your life, or who you did not get to be. These three questions are extremely challenging to answer, but they can help you drill down to help you determine what is important in life.

Ultimately finding a way to determine what is important to you in life is the clarity that will inform a sound financial plan. It’s not easy to do this, but it’s a key step towards achieving financial health.