Add Uncertainty to Your Financial Plans

Human beings don’t like uncertainty, especially when we’re contemplating our financial futures. It’s not enough for us to think that we’ll have enough money to send our kids to college, or to retire. We want to know exactly how much money we’ll need to achieve those goals — and precisely how we’re going to get it.

But I don’t think that certainty is possible. Not at all. Not even a little.

So here’s another idea: We should simply take our best guess — let’s call it what it is — at what we want our financial future to look like. We don’t have to be accurate. But we do need to set a direction based on our deepest inclinations. Then we can make decisions that support our goals — with lots of improvisation and further guesswork along the way.

That’s not how it’s done right now, though. Most financial planning involves software and spreadsheets and supposed precision forecasting. You meet with an adviser, who calculates that you need to accumulate $1.5 million in savings over the next 20 years. The resulting 100-page plan says this will allow you to withdraw a specific amount each year in 2034 dollars for the rest of your life, providing enough income to supplement Social Security and perhaps an inheritance and even leave your children your own estate, rounded off to the nearest thousand dollars.

Never mind that detailed long-term financial forecasting is about as easy as, and even less reliable than, predicting how much snowfall Utah will get next year, or how many women in your neighborhood will get the flu in the fall of 2019. The sad truth is, we’re absolutely terrible at predicting our own futures. Need proof? Think back 10 or 20 years. Did you have any idea you’d be doing what you’re doing now? Living where you’re living? Earning what you’re earning? Or that you’d be contemplating chucking it all and pursuing some kind of radical change?

When we put it this way, planning seems pointless, even silly. And when plans and planners rely on dubious long-term assumptions and tell you that you need to save impossible sums to meet your goals, there’s a good chance you’ll back slowly out of the room.

Don’t get me wrong. We do need to plan. But we’re far better off setting specific but flexible goals that reflect both our personal values and our best guesses about the future. Then we can do our best to reach those goals, revising our guesses and making course corrections when things change.

While it’s a bad idea to get attached to a particular notion about how things will play out, it is crucial to commit to the process. When you do that, you’ll feel different; you’ll be way more relaxed, at least around financial issues. Once you let go of the idea that the future must take a certain shape lest we flunk the plan that you spent so much time on, you’ll feel more engaged in something that belongs to you. Ironically, when you give up a false sense of control, you may well find that you feel more in charge of your future.

This process begins with a single line of inquiry, a consideration of an issue that conventional financial plans often ignore:What do we value? Another way to think about it is this: Why is money important to you?

I’m no longer amazed by the power of these questions. Over the years I’ve seen people cry when they realize that what they want isn’t more money but more time to start a family or the chance to go back to school and pursue a new career. Some people get to that answer in 20 minutes. Others require much more time.

These questions deserve far more of your attention than speculation about how much you’ll earn in your 401(k) plan over the next decade or two or three. Once you get clear about your most deeply held values, you’ll set goals that reflect them. What’s more, you’ll work hard to achieve those goals — with results that no financial plan can predict.

I like to think of those goals as guesses too, because that’s exactly what they are. For example, let’s say you want to start a family, without giving up your entire career. Your next move is to come up with a list of things that you think you can do to move yourself in that direction. They might or might not work, but they’re your best guess for now.

There’s absolutely no need to calculate exactly how much money you need in order to reach your goal. In fact, like most if not all goals, this one isn’t actually about accumulating a certain sum by a certain date. It’s about making some changes in how you (and perhaps one or more family members) spend and earn money. It might mean talking to your spouse, making a new budget, lining up a part-time job, borrowing money against your house … it all depends on your (ever-changing) circumstances.

Now comes the part where I’m supposed to tell you to stick to your plan, no matter what happens. Trouble is, I don’t think that’s good advice.

When I’m taking a vacation, I like to leave room for the unexpected. If the Leaning Tower of Pisa is crowded and boring, I might wander off and take a walk in the countryside. Likewise, financial plans should be flexible enough to accommodate change. At some point you’ll lose the job you thought was secure, take a financial risk that doesn’t pan out or have twins when you were only budgeting for one new baby. Or you’ll start a successful business or inherit a small fortune.

When any of that happens, you’ll need to adjust. No big deal: You were just guessing in the first place! And you knew that your guess would eventually be wrong, or at least out-of-date.

I get why people like precision forecasts. We’re scared of the future, and who can blame us? It almost always delivers disappointments along with the good stuff. But we need to accept the fact that surprises will arrive with a fair amount of regularity, so we can make plans that reflect life’s unpredictability. Otherwise, we’ll be stuck with our elaborate fantasies about the future — and they’ll inevitably let us down.

Financial plans that pretend to tell us more than we can actually know about our futures also tell us that if we do the right thing, we’ll never fall short. But that’s not true. Most of us won’t reach all of our goals. Such failures don’t have to be the end of the world, though. They can be the start of a new plan — one that begins, over and over, with a guess about what might make us happy.

Carl Richards was the director of investor education at the BAM Alliance, and is the creator of the Sketch Guy column in the New York Times.

This commentary originally appeared March 27, 2015 on NYTimes.com

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The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.