Can You Spot Bad Advice?
In the world of personal finance, there is no shortage of information available, so how do you know what is right for you? If the advice you are getting doesn’t consider both facts and all the “what if’s”, you could potentially be putting yourself at risk for financial failure. So how can you spot the difference between bad advice and sound advice?
There are 2 ways people make decisions: deductive reasoning and inductive reasoning. Deductive reasoning, which is common in the area of financial planning, requires making decisions based on facts that lead to specific conclusions. For instance, if you have 3 grapes and you eat 1, you now have 2 grapes. You can deduce that because you know 3 - 1 = 2. However, another way to make decisions is through inductive reasoning. This does not require a full set of facts before coming to a decision. It considers facts along with possibilities or different scenarios that lead you to make a decision. Think of it this way, you don’t wear your seatbelt in your car everyday because you know you will crash, you wear because there is a possibility that you will. When we’re trying to build a financial plan that will lead us to be the most successful, we need both of these types of reasoning to make a sound decision.
Don’t just take the predesigned road of goals and targets to get you to retirement. Take the one that considers different outcomes, to maximize your financial success. Financial advisers may ask you “What age will you retire? How much income will you need at retirement? How long will you need that income?”. These are deductive questions that have a qualifiable answer, but when it comes to your actual life, you never know what the future holds. You may believe that you’re going to retire at 65, but you can’t really be certain it will happen that way. Your financial plan can’t just account for numbers, it has to account for all the ever changing variables in your life.
Do you consider money and math to be equivalent? The reason you need both of these types of reasoning when doing your financial planning, is that math and money are not the same thing. This type of thinking could be the #1 thing holding you back from financial success. Money is a commodity that can change in value or erode over time. Think back to the grapes. If you buy 3 grapes but sit them on your table how many grapes are on your table? Yes, the answer is 3 grapes because that is the mathematical conclusion. But what if you never touch the grapes, and they are sitting on your table for 10 years? Will you still have 3 grapes in ten years even if you didn’t touch them? Or will they remain in the same state (pun intended) that they were in when you left them? You can’t really know for sure. This is how you should be thinking about your money.
If the advice you are receiving is only accounting for deductive reasoning, perhaps it’s time for a different approach. If you want to know if you are truly getting the advice you deserve...advice that looks at all the possibilities, talk to your Leap Adviser. It’s time to make your financial life sane, sound, and simple.