It might have been Albert Einstein who said that if you can’t explain something to a six-year-old, you don’t understand it yourself. It’s a philosophy that Carl Richards, a certified financial planner and creator of the ‘Sketch Guy’ column in the New York Times, brings to the often arcane world of money, finance and investment in his book, The One-Page Financial Plan.
If there is one book recommended for people who dismiss finance, budgeting and investing as dull, boring and irrelevant to their busy lives, Carl’s slim but punchy volume The One-Page Financial Plan is a terrific antidote.
The crux of the book is one simple, but obvious idea. A financial plan doesn’t start with technical details, but with asking yourself what you value you most in life, and in showing you a way to make decisions that keep you focused on those values.
In fact, that is the missing link in most people’s concept of finance and investment and explains why this whole area usually elicits the sort of enthusiasm generated by discussion of dental flossing, fridge cleaning and tax returns.
What is your goal?
In his book, Carl comes at it primarily from the human angle. First, ask yourself why money is important to you. One person may want to save to travel the world. Another may simply want to invest in a good pension fund. A third has a great business idea. The money is a means to an end, not an end in itself.
“The best financial plan has nothing to do with what the markets are doing, nothing to do with what your real estate agent is telling you, nothing to do with the hot stock your brother-in-law told you about,” Carl writes. “It has everything to do with what’s most important to you.”
In many ways, it helps to say what a financial plan is NOT. It is not a detailed roadmap for the rest of your life which must never be diverted from. It is not a set of forecasts about interests rates, currencies, bonds and shares. It is not a product recommendation kit, full of derivatives and ETFs and managed funds.
A financial plan is really a framework to help you think about the future and give you a structure for reaching your goals as they are today. Of course, as your goals change — and they invariably do – your plan can change. But the plan provides for diversions along the way. And it helps you sort out your priorities.
Once you have identified your goals, you can start to fill in the details of assessing your current financial situation and setting up a simple balance sheet of assets and liabilities. So put your investments and savings on the left, your mortgage and debts on the right.
Once you know your net worth, you can set about setting up a budget, looking at how much you are spending and on what. Again, at this point, you can come back to your values. If your goal is to travel more, does it really make sense to be blowing half your disposable income on eating out and going to the pub? Maybe if it’s just the social contact you crave, why not meet up with friends in the park and go for a walk?
Once you’ve worked out where the money is coming from and how you are spending it, set up a timetable for reducing debt and a plan for boosting saving. From there, you can start thinking about your investments.
Carl here recommends a scientific approach, or as this website has long described it, an evidence-based approach. That means diversifying your portfolio, only taking risks related to a return, and focusing on things you can control – like cost.
Sticking to first principles
But the most important link in this whole chain is the very first one – having a very clear idea of why money is important to you and what goals you are seeking to reach. Once you are clear about your values and goals, it’s critical that you stick to them.
“Here’s the thing about goals,” Carl writes. “The ones that matter often involve a sacrifice. It can be tough to break patterns and deny ourselves instant gratification in order to stay focused, but when the goals are important enough, it’s always worth it.”
None of this means you shouldn’t seek out professional advice. But that process is much easier if you start with that blank of sheet of paper and sketch out what is most important to you in life and why.
Yes, a one-page financial plan really is enough. And reading this book is a good first step on a potentially life-changing journey.
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If you’re new to investing, TEBI founder Robin Powell and fellow financial blogger Ben Carlson have written a book that you really ought to read. It’s called Invest Your Way to Financial Freedom, and it’s published by Harriman House.
Primarily written for a UK audience, the book has no hidden sales agenda and is based on peer-reviewed academic evidence. It explains, in simple terms, how young investors can develop good habits, save a fortune in unnecessary fees, and achieve financial freedom many years earlier than they otherwise would.
You can either buy the book direct from the publisher or via Amazon:
For those in the UK,
Buy the paperback via Harriman House here
Buy the paperback via Amazon here
Buy an audio version on Audible here
For those outside the UK,
Buy the Kindle version via Amazon here
© The Evidence-Based Investor MMXXI