It has been estimated that 11 million bits of data travel across our brains every single second, yet we only process about 50 bits per second. You don’t have to be an expert in Information Theory to understand that this means two things: we simply can’t focus on everything and what we do focus on matters. An excellent example is what we choose to emphasize in our financial lives, yet many people have allowed their ‘financial pyramids’ to be turned upside down.
What is a Financial Pyramid?
Much like the food pyramid indicates what’s most important for our diet, a financial pyramid depicts what matters most to our financial health. Unfortunately, many people are misplacing their focus. For example, if you’re following the advice of your broker when it comes to financial fitness, chances are the foundational bottom level of your pyramid consists of your investments and your returns, with everything else being secondary.
While investments and returns certainly play a role in proper financial planning, putting too much emphasis on them means you are in a constant state of pursuit, chasing the best returns and living in a volatile whirlwind of market fluctuations. Unfortunately, this is a fool’s errand.
What Your Pyramid Should Look Like
For true financial health, you need to flip the script on what the conventional financial pyramid looks like. The thing that should anchor the bottom of your pyramid is your goals, followed by your plans to achieve them. Can you see how this view of financial health keeps you playing the long game, rather than chasing the market? Sure, investments and returns play a role in this narrative, but the real focus should be on how your overall asset allocation will serve your long-term financial goals.
Think about it: our financial goals are of primary importance, and our plans to reach them produce behaviors that result in an output. Rather than simply focusing on output, a goals-based financial pyramid helps us maintain a healthy view of the big picture of our finances and helps us ride the ups and downs when they come. Whether we realize it or not, there’s a lot of emotion involved in dealing with short-term price volatility, and it can be stressful and exhausting to live life by a financial pyramid that puts so much daily focus on investments and returns.
Our goals help us determine the speed at which we need to move and the level of risk that suits us. Using a goals- and plans-based pyramid protects us from making emotional decisions that might serve us in the moment, yet ultimately cause damage.
What This Means in Practice
So, you’re ready to flip the script on your personal financial pyramid – what does that look like? First, you need to put serious thought into your long-term financial goals, then review where you are and whether your current asset allocation and financial decision-making process support those goals. You also need to commit to ignoring “shiny objects” – those seemingly fairytale investments that promise to solve all your problems in the blink of an eye. These are never what they seem, and they can take you off course quickly.
There is a multitude of information coming at us every moment, and it’s up to us to determine what gets our focus and what doesn’t. When it comes to long-term financial fitness, an emphasis on goals and plans will serve us more fully than a simple emphasis on short-term results.
