Your Financial Plan Needs Room for Error

Best-selling author Morgan Housel says “The most important part of every plan is planning on your plan not going according to plan.”

Building room for error into your financial planning reduces the need to forecast markets. Instead, you fully anticipate choppy markets and your margin of safety reflects the difficulty of precision involved when planning for the future.

The Importance of Creating Room for Error

By creating room for error in your plan, you are acknowledging that no one really knows exactly what the future holds. Room for error allows you to focus on an array of possibilities instead of only one outcome.

Having room for error in your financial planning allows you to look past the computerized models that estimate future wealth. Many of these just extrapolate an annual average for investment returns and inflation. What if reality differs substantially from these estimates? Projecting future wealth is actually a blend of art and science.

Most investors recognize the difficulty of predicting future prices of groceries or gasoline, but when it comes to personal finance, this awareness appears to falter. If you expect everything to work out exactly as you planned, you could be both surprised and disappointed.

Nothing Ever Goes as Planned

Think about the financial decisions you made in the past. Have all of these worked out precisely as you planned? If not, why would you be under the illusion that all of your future decisions will fall into place just as you anticipate? Doesn’t it seem more likely that you might encounter some unexpected bumps in the road along the way?

A critically important benefit of room for error planning is that it gives you time and space to endure bad financial times while focusing positively on the next phase of your plan. Successful financial planning by its very nature is more akin to running a marathon than a sprint. It’s a long-term endurance activity.

If your financial life is largely dependent on a particular source of income, what would happen if this was interrupted, reduced, or went away entirely? If you have built room for error into your planning, your accumulated savings can help bridge the gap.

You’ve probably had some firsthand experience with things breaking. Your car, dishwasher, and computer are all things that can sometimes break. With your personal finances, you need to understand that some of your assumptions about the future won’t hold…they will break.

Save for the Sake of Saving

The core of room for error planning is the realization that you don’t need a very specific reason to save. You probably can’t reasonably predict exactly what these savings will be used for 10 or 20 years from now. It’s just important that you have these funds to rely upon for whatever future lifestyle consumption needs appear.

Room for error helps just when you need it most. Build this into your planning even when everything is going well, understanding that this cushion can help you to withstand the inevitable financial downturns. Start there. Ready for a real conversation?

Disclosure

Apollon Wealth Management, LLC dba J.E. Wilson (Apollon) is an investment advisor registered with the SEC. This document is intended for the exclusive use of clients or prospective clients of Apollon. Any dissemination or distribution is strictly prohibited. Information provided in this document is for informational and/or educational purposes only and is not, in any way, to be considered investment advice nor a recommendation of any investment product or service. Investing involves risk, and while remaining invested can support long-term goals, it does not guarantee a profit or protect against losses. Advice may only be provided after entering into an engagement agreement and providing Apollon with all requested background and account information. Please visit our website https://apollonwealthmanagement.com for other important disclosures.