Many people think financial decision-making nowadays is more complex. This is true just because there’s a lot more information and choice available to all of us. But there’s also many other factors at play which have made the margins for error much smaller.
For example, housing is more expensive now than when my parents were looking to buy their first home. But it’s not just the value of the house that has changed but its connection with ordinary earnings. When my parents bought their first house it was valued at about three times their wages, but now the value of your house might be closer to 14 times your wages. This means it may take you 25 years to pay it off rather than 15 years. We’re also living longer in retirement so we’ve got to think about the amount invested because it needs to last for 30 years or more.
So if you’re getting advice from your parents or close friends from their generation, you have to be a little careful because the fundamentals have changed. Things were different when they were making the same financial decisions. You cannot rely on a roadmap from 30 years ago, because one decision can make a lifelong difference.
Given the margins for error are smaller, having a good framework to help you make sensible financial decisions is critical today. The reality is you can’t do everything and this often makes people feel like they’re not achieving anything at all. We all want a great car, that great house, overseas trips, but as you start to accumulate wealth you’ve got to make sacrifices. Often, people who seem to have it all have either got lucky at some point in time or they’ve sacrificed a lot along the way.
One of the things that has changed in this generation is the need to aim for multiple goals at once. My parents told me to buy a house, get on top of the mortgage and then think about other things. But this idea is fundamentally flawed today. House prices are now so much higher, both in absolute terms and compared to wages. Completely delaying a new car or holiday until the house is paid off could mean waiting until retirement! A quality framework takes you through the advantages and disadvantages of one decision over another. It helps guide you through the sacrifices that you may have to make and how they will lead you to achieving multiple goals over a period of time.
The instinctive reaction to these changes might be pessimism around your future. But I disagree with the idea that these changes mean that you can’t live the life that you choose. Yes, asset prices are more expensive compared to what you’re earning. Yes, we’re living longer in retirement, so we need a larger retirement pool from which to draw from. But if you have a quality decision-making framework and someone to challenge you, you’ll come out the other side with a clear plan to get to all your goals.
Todd Clifford is Executive Advisor & Head of Client Experience at Viridian Advisory