Most people approach financial decisions by trying to find the right answer.
When approaching questions like these, there are two different ways of thinking that can help us make better financial decisions: divergent thinking and convergent thinking.
In my experience, real financial planning requires both.
Divergent thinking starts by expanding the possibilities. Imagine you suddenly have an extra $100,000. A question that is commonly asked that you might ask as well:
Should I invest it or pay down my mortgage?
But why are those the only choices? Only two possibilities?
Consider this: You could pay down the mortgage balance. You could invest in your brokerage account. Max out retirement accounts. Do a Roth conversion and use some of the cash to pay the taxes. Use as a down payment for real estate. Invest in your business. Build your cash reserves. Add to education savings. Make a charitable donation. Or, divide the money among several of these.
Divergent thinking, when applied to financial planning, asks:
What are all the reasonable things I could do with this money?
When you can list all the possibilities, it becomes easier to set a priority order and align those decisions to your financial purpose, or what’s most important about about how you use your money.
Eventually, we need to use convergent thinking to narrow those choices. With the same $100,000, now we start asking different questions when considering paying down the mortgage balance, such as:
What’s the mortgage rate? What’s your tax rate? How much liquidity do you already have? Are you behind on retirement savings? Is most of your net worth already tied up in your business? Do you have a large expense coming? What are you actually trying to accomplish?
Maybe paying off a 3% mortgage doesn’t make much sense when liquidity is valuable and you have better uses for the money. Maybe you’re approaching retirement and eliminating a $4,000 monthly mortgage payment significantly reduces how much income your portfolio needs to produce. Maybe it’s better to invest a portion of the money with the sole purpose of making the mortgage payment and letting the market help.
Same $100,000.
Different circumstances. Different priorities. Different answer.
Monte Carlo simulations could be considered a convergent tool using thousands of divergent outcomes. When used in financial planning, however, the false certainty/uncertainty of a successful Monte Carlo outcome becomes problematic.
A Monte Carlo simulation can test thousands of possible futures, but it can’t tell you whether you’re testing the right financial life. The longer we project the assumptions, the less reliable they become as the tail of assumptions gets too wide. Life moves fast, and your financial choices happen in real time… not based on what may happen 30 years from now.
Those possibilities require divergent thinking before we use convergent tools to evaluate them. That’s personal financial planning.
This matters even more as your financial life becomes more complex because financial decisions don’t happen in isolation. It’s all what I refer to as a giant bowl of financial spaghetti—everything touches.
This is how I think real financial planning should work:
Sometimes the answer isn’t A or B. Maybe it’s 25% toward A, 50% toward B, and 25% kept available for something we haven’t anticipated yet.
Math matters. Taxes matter. Rates of return matter.
But before we attempt to quickly optimize the answer, we need to make sure we’re solving the right problem. The best financial decision starts with realizing you have more choices than you thought.
Disclosures
Life Moves Wealth Management is a registered investment advisor offering advisory services in the States of Arizona and Indiana, and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. Information contained on this site should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.
The information on this site is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon as the sole factor in an investment making decision. Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal any performance noted on this site.
HYPERLINK DISCLOSURE – The information being provided is strictly as a courtesy/convenience. When you link to any of the web sites provided here, you are leaving this website and assume total responsibility and risk for use of the web sites you are visiting. We make no representation as to the completeness or accuracy of information provided at these websites. Life Moves Wealth Management is not liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technology, web sites, information and programs made available through this website. Life Moves Wealth Management does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Life Moves Wealth Management’s web site or incorporated herein, and takes no responsibility thereof.
Author: Dale Shafer II, CFP®, CBEC®, APMA®
This website uses cookies to make sure you get the best experience on our website. You can find more information under the Privacy Policy.
