Saturday, November 26, 2005

Rational Assumptions for Personal Financial Freedom

I want to grow my assets to financial independence at age 30. That goal aside, this blog is about personal finance and how to manage money. A lot of "what should i do with my money" depends on what you assume about the future. Most "how much do i need to retire" calculators ask you to assume a rate of return on your investments, a rate of inflation, and a yearly amount you need to live in retirement.

Those are all well and good, but those are some of the least interesting and least important assumptions that need to be made because they are assumptions that don't materially impact the way you invest your finances. How you manage your finances leads to those assumptions (bonds, assume 5% return; stocks 9 or 10%), not the other way around. The following are what I think constitute a set of rational assumptions that should be drivers of personal finance:
  1. I have no job security. My job could be outsized (outsourced or downsized or otherwise eliminated) at any time.
  2. I will never recieve a penny from social security.
  3. I will pay 35% taxes on my income, and that number will go up over my lifetime.
  4. My company's pension plan will fail.
  5. My children will not recieve one cent from financial aid.
(the post got deleted in transit here, so I'm retyping the general gist)

These are harsh assumptions, but once you come to terms with them they are quite liberating. It is antithetical to say that you are "financially independent" if you are dependent on someone else for your paychecks, retirement, or for your children's college. If these assumptions don't come true and I do end up getting something from one of these programs, great - found money. But if not, there will be nobody to blame but myself.

Financial freedom is being free regardless of what happens, so I think it is only rational in personal finance to plan for worst case scenarios.

1 comment:

Suresh said...

Plan for the worst; hope for the best. Always sensible.

If you had a choice, would you even be working for your current employer (or more accurately for the enrichment of your employer's shareholders)? Who or what would you working for? My gut feel is that, in terms of personal financial freedom, it's helpful to be working toward something, not just away from something else.

Is another rational assumption for personal financial freedom "I would work for _____[someone else or for some other cause]____ were I sufficiently financially independent"? Such an assumption may be the starting point of your very own Mission Statement.