Two numbers cannot paint the full picture of your financial life
"How am I doing?" is one of the most useful questions in life. Stopping to take stock in any area is what lets us correct course while there's still time to do something about it. We'd naturally encourage you to ask it about your financial life too. It's the question our regular planning meetings with clients are built to answer. But we've noticed that when people ask it, two numbers tend to be…
Measuring your financial life against one number or another may not give you the full picture. Two commonly used numbers are market returns and the returns quoted by others, but neither truly reflects your personal progress. A market index has no specific goals or circumstances, making it an apples-to-oranges comparison with your own financial plan.
Another issue arises from the fact that a well-diversified portfolio generally lags behind the best-performing asset class, merely reflecting the nature of diversification rather than any flaw in the strategy. Moreover, friends boasting about high returns often omit the associated risks, which could involve overly concentrated investments or holding positions that could be easily lost. Therefore, relying solely on these external numbers can be misleading.
Instead of fixating on these external markers, it's more beneficial to reflect on whether your portfolio has fulfilled its intended purpose and whether it can sustain the lifestyle you desire. To achieve this, consider asking five crucial questions each year, ideally in the presence of a qualified financial advisor:
1. Are you on track to fund the life you want?
2. Is your savings rate sufficient?
3. Will your income sustain you throughout your life?
4. Have you made any irreversible errors?
5. Does the money contribute to a lifestyle you genuinely appreciate?
It's easy to overlook the significance of the last question, as it rarely appears in conventional financial reviews. A well-crafted plan can be on track yet still fund a life that wasn't the one you envisioned. Answering these questions truthfully might require making adjustments such as increasing savings, decreasing spending, modifying withdrawals, or revising your long-term plans.
Unlike market indices or friends' success stories, these metrics are within your control, and thus, they provide actionable insights to steer your financial life in a direction that aligns with your aspirations.
Written by urgent.news from The National Business's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
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