Tradeoffs in Life and Financial Planning

Just last month, I had to decide between going to my school’s prom and going to the DECA International Career Development Conference on time. If I went to prom, I would miss out on opening ceremonies and the excitement of the first night. If I chose to go to ICDC, I would miss prom with my friends and possibly miss out on a lot of fun. High school has been full of tough decisions with benefits and drawbacks to both options. I have learned that it is not possible to do everything and choices must be made.

As I have worked in the financial planning field for the past year, it seems that in life and financial planning, everything is a tradeoff. Whether you’re deciding between driving somewhere or walking to save money on gas or deciding how much of your income to invest vs spend, there is a tradeoff that is considered before making a final decision. What I’ve learned is that the job of a financial planner is not to tell a client which decision to make but rather to inform a client about the implications of making a choice to help them make the right decision. Even if the planner advises one option over the other, there may not be one right answer for everybody to an issue. In fact, many decisions seem like they can be boiled down to personal preference. Here are some examples of tradeoffs that I’ve seen while working on financial planning.

Taking a job that you like more for less money is one of life’s biggest inner conflicts. On one hand, you are doing what you want to do; on the other, you could be making more money by working a job that you don’t like as much. I’ve learned that a financial planner cannot conclusively say that everybody should work a job that they love, nor can they say that everyone should work the job that pays the best. It wouldn’t be true. Different things work for different people at different times. Maybe having the extra money would be more valuable to one person than the satisfaction they would get from working a job they love. Other people may value that satisfaction over the extra money.

Retiring earlier vs retiring with more money to spend is also a common tradeoff. Someone could retire at 60 but not have much money to spend. If they retired at 65, they would be able to spend a lot more. For some people, the extra money is worth 5 more years of work. Others may rather retire early with less to spend. This choice is very much a personal preference. If a client wants to retire early and spend less, that choice is theirs. A financial planner can help put numbers behind how much the difference will be in spending capacity so that the client can make an educated decision.

Another financial planning tradeoff that I see is risk vs return. One investment option may have a much higher potential return than another. However, it may also carry a higher risk. This is why planners have their clients fill out a risk tolerance questionnaire and talk about what risk means in an investment portfolio. A financial planner will recommend a portfolio based on how much risk the client is willing to take and what will lead to the greatest likelihood of success in their plan. In the end, it is up to the client to decide how much risk will be taken. Again, there is no “correct” amount of risk to take.

Insurance also seems to be another good example of this. While paying a premium every year seems like a waste if you never need to make a claim, it reduces the risk that you will have to pay for a huge accident or expense out of pocket. Similarly to investment risk, there is not a correct amount of insurance to purchase. One person may want more health insurance coverage than someone else, even if both are at the same risk of developing a condition. The person who is buying less is carrying a higher risk but is also saving money. Again, it just comes down knowing the tradeoffs and making an informed decision according to personal preference.

Obviously, a planner will have input on what is right for each client in some cases. A planner probably wouldn’t advise a client who is approaching retirement to put all their accounts into the riskiest model. Conversely, they wouldn’t advise a young person who’s fresh out of college to invest in the safest model. However, if the client wants to do either of those, they can do so. I’ve learned that the job of a financial planner is to inform the client of the tradeoffs of the decision so that the client can choose what works best for them knowing all the potential implications.

In the case of prom and the DECA conference, I chose the conference. I had a great experience there and I think it was the right choice for me, even though I did miss a fun night with my friends to do it.