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Finance is Relative

A while back Apathy Ends posted a twitter survey asking which is more important, increased income or cutting costs. As I contemplated how I would answer the question I realized something. My answer was relative to my current situation. I realized my answer would be different depending on when you asked me. This got me thinking of how much in finance is relative.

Income or Cost Cutting : Relative

Lets start by answering the twitter question. The reason I viewed the answer as situational dependent is because of my expectation on income at different career stages. Later in my career when I’m near the top of my pay scale increasing income would likely have a lower marginal impact then cutting costs.

Simply put at some point your pay is so high that unless your running a business on the path to being a unicorn significant incremental changes in pay will be hard to come by. Similarly if your living as a college student eating Raman and making 30k a year, cost cutting is not going to make a dramatic impact on your long term financial goals. This is not to discount the value of living within your means, it’s just to point out the reality that even saving 100% of 30K a year will always be less than 40% of 100K a year. So basically the choice of best bang for the buck in increasing your financial freedom has to be based on your current and potential income changes within your specific career.

Views on Debt : Relative

Similar logic applies to many other areas of finance. Take our prior conversation on leverage and debt. Standing at the peak of a Financially Independent net worth leverage is a tool. It allows you to further increase your net worth. Meanwhile at the trough of heavily negative net worth it becomes a bad influence capable of seducing you into digging yourself ever deeper. Thus most people’s views on debt are either relative to the amount of debt they currently have, or a factor of some prior experience with debt.

Investment Plan : Relative

Even your investment choices are relative. Years until retirement or major life purchase is one example. Both require more liquidity than other circumstances. That varying need for liquidity drives the length and amount of any bonds you might hold. Couple that with a tendency as you get older to lower your risk tolerance. As Bernstein once said, “Once you’ve won the game, stop playing”. He was basically saying once you have enough money to support your lifestyle indefinitely you should move your cash to less risky assets. Why take the risk when you’ve already arrived?

Unless you are looking to pass on a legacy to kids, he’s right. If I had 10 million dollars and no kids, I’d probably have nothing but long term bonds. Conversely as a 35 year old still building his finances I need that risk. As such I’m going to have a much higher percentage of stocks than bonds. While I may never make it to 10 million, and I do have kids, as I get older I forsee decreasing my stock allocation at some point due to increased fear of loss (lower risk tolerance). I’ll see my situation as fewer years of opportunity ahead and more of not enough years to make up the difference. In this way my age and my relative net worth make my investing plans relative.

The Personal in Personal Finance: Relative by Another Name

I’ve gone out of my way in most posts where I give advice through the history of this blog to present options rather than a set plan to my readers. Simply put, the relative I keep mentioning is what makes each area of your financial path personal. The basic laws of personal finance, as in the basic laws of physics in the Theory of Relativity, stay the same no mater where you sit.

That means no matter what you make you should spend less than you make, control your expenses, maximize your income, invest in low fee index funds, and constantly improve your skills. However the how, how much, and why of all of those items is person specific. I’ve written in the past about reading multiple financial news sources to come up with ideas. I’ve also noted you should then take only those that resonate to you and apply them. Essentially you should make your own plan. The thing is, given the relative nature of personal finance, you need to realize you will not just make one plan.

The Finance Plan as a Living Document

The thing is, even within your specific life your situation is ever changing. Your relative position is not the same today as it may have been last week. Your plan needs to reflect that fact. So for example last October my wife became a stay at home mom. That created one plan. A few weeks ago my wife changed her career again to become a contractor. That was a change of both her plans (she’d never intended to do more than be a freelance writer) and our financial plan (I see our savings plans changing dramatically by the increased income). Both are valid reasons to change our plans. However, the thing is this willingness to change your plan is not without risk. I’ve written in the past that making decisions in the moment can adversely impact your ability to make decisions. I noted that planning ahead can mitigate this risk. This is very true. So what of the situation where your relative situation has changed and now you need to ensure your plan adjustments are not driven by emotion?

Changing Plans without Emotion

I’ve found over the years a few tricks to ensure I minimize emotion driven changes when it comes time to change my plan:

  • Ease into the change. I tend to like the technique of piloting. I highlighted this in the post I wrote about my wife becoming a stay at home mom. Essentially before moving to a single income permanently we experimented with living on just my income. This allowed me to ensure the new plan/decision would work with a backup path should we make a change in plans for the wrong reasons.
  • Ease into it some more. Consider limiting your changes to a few things at a time. For example in the financial world with a major income change it’s probably not the best to increase your spending or change your investing plan before you understand your liquidity situation.
  • Analyze the plan logically. The first two items here really have to do with understanding the impact of an individual change. In this case we either make some assumptions about those impacts or plug in the results of the first two items. Start by mapping out various scenarios via probability analysis. Apply a percentage to different scenarios as well as an impact. Average the various values and evaluate where you land. So for example say I went nuts and decided to gamble. Say I had an 80 percent change of losing all my money. A 10 percent change of breaking even. And a 10 percent change of tripling my money. Say I had 100 dollars. Should I invest? Well -100*80 percent+10%*100+10%*300= -40. So pretty much this purely hypothetical situation is most likely going to fail. You can do something similar for any plan change, though realize your estimates of impact and percent will be hard to separate from your emotions. Still it’s better then nothing.
  • Talk the plan over with others. Consult a mentor. I’m a strong advocate of having a mentor or mentors in career and life. It is really important to have someone who has been there to bounce things off of. They may present input you have not considered. Just choose your mentors wisely. Pick someone who is successful and represents where you would like to go rather than where you have been.
  • Explore what others have done. I’m also a great fan of benchmarking. I go back to my comments in the past about reading about what other people have done in your situation. The situation does not even have to be exactly the same to potentially glean a different path forward. Considering how other people have approached a situation can help with removing the emotion from the situation.
  • Clearly outline and track plan changes. Review them regularly after the fact to ensure they were made with the correct drivers. I tend to highlight changes in red and date them. If I find I did make those decisions by emotion, then I take it as a lesson to ensure I do not repeat the same emotional decisions later.

Do you have an example of changing your financial plans in relation to a change in relative situation? Do you have any tips to keep emotion out of any plan change?


  1. Dan
    Dan August 9, 2017

    The most difficult change is retirement. I say that because a) I observed my father before & after retirement and b) I am contemplating early retirement.

    In retirement, you typically are much less able to increase income so your only choice is to reduce costs. However, “the situation” can be completely different from the previous life goals. If you have adequately planned for your retirement, you should have enough so that you can safely apply the 4% rule. Doing so may decrease your net worth. My father could not fathom this concept. He adjusted his costs down so that he could live on his pension + Social Security + IRA and still have an increasing net worth. He did this to the detriment of his own health. Example: he was developing dementia at the time he died. I wanted him to have a nurse come in for an hour or so 5 days a week for no other reason than to remind him to take his medicine. He was forgetting to take his high blood pressure medication. He wouldn’t pay for it.

    Anyway, I read that many retirees have difficulties adjusting their finances in retirement. They have spent a lifetime living within their income or measuring their financial health by year-on-year net worth growth. In retirement, their “income” is reduced and they are unwilling to accept a year-on-year net worth decrease. It causes unnecessary sacrifices in retirement.

    Retirement doesn’t always allow for an “ease into the change.” The other thing I notice is that as you grow older, you cannot have a mentor. a) you have more experience than any mentor you could find. At some point, the mentoree has to become the mentor. b) As you live your life, it become more personalized. When you are young, there are options ahead and a mentor can help you choose an option. After you have chosen the options, there are fewer choices available and hence few mentors. Imagine a decision tree. Point A1 is you at 22 or whatever age and right out of college. Six or seven decision points later, there are a 1000 or more branches. A lot of people have been at Point A1 but not so many at Point G398. After a certain number of life experiences, you are “unmentorable.”

    • fulltimefinance
      fulltimefinance August 9, 2017

      While I agree what you are mentorable on changes, I believe its quite likely you will open up new directions where others still may have actionable information. For example, mentoring for your career can go only so far, but if you decided to change direct to start a business for the first time then a mentor would provide value.

    • Chris Haas
      Chris Haas August 10, 2017

      I had a similar issue with my father. In that he changed, he enjoyed working and didn’t have enough hobbies so when he retired at normal retirement age he was utterly bored possibly clinically depressed. After a few years of puttering around he decided to cut a few lawns. He only does mine, my brothers and 1 other person, not near enough to justify the equipment he purchased, but the change in his personal happiness having some purpose back is amazing. I will be taking the advice of FTF and wading into the pool instead of a drastic change of a sudden retirement. I just wish I could have a little taste today…darn kids in college…..

      • Dan
        Dan August 10, 2017

        re: your father’s lawn care is a hobby. Hobbies are highly recommended for retirees.

        Having been in the workforce fulltime for almost 25 years, my observation is that the best laid plans for retirement get torpedoed 33% to 50% of the time. However you think your retirement is going to be approached, there are numerous factors that typically speed up the retirement date.

        1) Layoffs
        2) Voluntary Severance Packages
        3) Health problems
        4) Family issues
        5) “Take this job and shove it” incidents

        I hear people say, “I’ll work until age 50.” What happens if you get laid off from work at age 48? You can get another job (maybe less pay or less satisfying) for two years and stick with the plan. Maybe you can’t get a job or can’t get a job you are willing to accept. If you are good with your money, maybe you already have enough financially to retire at age 48. Maybe the severance package pushes you over the top.

        I have worked with many people who have been faced with sudden unemployment and have difficulties adjusting to early retirement (“early” in the sense it was earlier than planned).

        Anyway, the point is that I bet even money your plan for retirement doesn’t come to fruition because of external factors. For people in the FIRE community, the hardest part is probably not financial but rather mental. FIRE people like to make plans and measure themselves against a plan. When the plan gets blown up, it is difficult to adjust and doubly so if you have all this free time for the first time in your life.

        I don’t know what I am going to do when I retire. As a result, my fear is getting laid off or being offered a severance package before I figure it out. It’s not the money but I know myself well enough to know that sitting at home watching TV is going to get very boring very fast. I could travel but then I harken back to my father. Will I have the confidence in my investment plan to withdraw 4% even if it means my net worth declines?

        • fulltimefinance
          fulltimefinance August 10, 2017

          Very true, the risk of sudden retirement hits in many ways. I routinely use it as a basis for an argument that everyone should pursue financial independence, but there is a whole separate question of how to handle the event should it occur. I may have to explore this idea further in a future post.

  2. SMM
    SMM August 10, 2017

    My plan for emergency savings fund is one I question a lot. How much do I really need given my wife works too? If I had no job, I could start driving Uber relatively soon anyway. Should I deploy more from my emergency fund into investments? I have done so, but that number I believe is relative to a lot of people.

    • fulltimefinance
      fulltimefinance August 10, 2017

      I’m in much the same situation. I have an upcoming post about our recent adjustments to our emergency funds. Our current funds are in serious flux thanks to the significant recent changes in our employment and financial situation.

  3. Grant @ Life Prep Couple
    Grant @ Life Prep Couple August 10, 2017

    I was a big fan of the Roth IRA starting out but now prefer the 401k. The switch came from a new desire to retire early not retire rich. My income will be lower so my taxes hopefully will be lower. I figure I can worry about keeping my tax burden low when the time comes.

    • fulltimefinance
      fulltimefinance August 19, 2017

      I’m more mixing and matching at the moment but as we pass towards retirement I too expect a shift towards Roth IRA.

  4. Mustard Seed Money
    Mustard Seed Money August 12, 2017

    I definitely agree with you regarding a mentor. I think finding someone that has gone before you can be a huge help in the transition in whatever you are doing in life. Being able to bounce things off people has really helped me throughout my career and something I actively try to pass on to others. Great post!!!

    • fulltimefinance
      fulltimefinance August 19, 2017

      Thanks MSM. It took me a while to find mentors as to be honest I was the first of my family in the corporate world. Once I made those connections though it was a significant leg up.

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