Three distinct scenarios. Optimistic. Pessimistic. Realistic.
Reflecting three distinct world views. All worthy of consideration. None should be dismissed or ignored.
The optimist believes everything is awesome. Rainbows and unicorns. Streets paved with gold.
The pessimist believes things may be bad now, but can always get worse. Doomsayers and gloom merchants.
The realist has low expectations, so they are often surprised on the upside. Accepting their journey will include an endless series of “life happens” events. Adapting. Evolving. Making it up as they go along.
But here is the thing: the optimist may generously describe the pessimist as a realist, someone seeking only to protect themselves from the downside. The pessimist would probably describe themselves the same way, after all there is no point pretending that life is anything but uncertain. The only one likely to disagree with those assessments is the realist themselves, seeing both explanations for what they are: rationalisations. Perspective is a wonderful thing!
This week there has been much written about the equity and crypto markets dipping. It happens.
Cue the chorus of “don’t panic” admonishments from old hands who have seen it all before.
Next, play the boastful gloating of those “picking up stocks on sale”. The same crowing crowd who last week sagely counselled against trying to time the market and advocate dollar-cost averaging.
Radio silence from those whose net worth took a beating. Crystallising losses as they fretted over inflation, interest rates, and political uncertainty. Particularly quiet are those who had earmarked their investments to pay for immediate house deposits, school tuition, care home fees, and the like.
Spare a thought for those swimming in the investing deep end. Holding mortgage sized mark-to-market margin loans. Pursuing a strategy of selling leveraged naked put options. Grey hairs are earned when the rocket fuel of investment returns inverts to supercharge losses instead. Most, but not all, will have sufficient wealth to weather the storm. An exciting, but hopefully survivable, ride for those who can afford to keep their nerve.
All the noise gave me pause to consider some of the real life-altering changes in direction. Not the temporary blips on a stock chart, where investors make notional paper losses on money they can afford to lose. No, I’m talking about the major dislocations, incurring permanent lifestyle adjustments.
The last couple of months I’ve ventured into the world of financial projections. Attempting to gaze into a crystal ball and imagine what the future may have in store. All art, no science, no matter how precise the spreadsheet. Assumptions made. Narratives selected. White lies and fairy tales told to help us sleep well at night. Choosing to believe we will be ok. Maybe even live happily ever after.
Truth be told, the projection exercise has been a miserable experience. Here there be dragons!
Confronting inconvenient truths.
Facing up to past demons and current monsters lurking in the shadows.
Paranoia or pragmatism? Only hindsight is qualified to judge, no help at all in the here and now.
Projections are simply modelling how scenarios may play out. Best case. Worst case. Most likely.
The personal finance world loves a “simple” story. Yet simple decisions have long-tailed consequences.
Take a common example: having a child.
Best case? A healthy addition to a loving family. Life gets richer, even as lifestyle costs grow.
Worst case? Jealousy. Resentment. Competition for scarce resources: time, money, and attention.
Most likely? Somewhere in between. Life as the parents knew it will never be the same, replaced by a new normal. Not worse, just different. Adventure travel, free time, sleep-ins, and sex on tap becoming distant memories. Replaced by rewarding experiences gained while guiding offspring as they grow into the adults they will one day become. Often times, living vicariously through them.
Some children will succeed, the subject of parental pride. Independent thinkers. Financially secure.
Some join the ranks of life’s takers. Constantly with their hands out. Expecting support. Demanding more. Perhaps suffering delusions of grandeur, or having kids of their own which they can’t afford.
A few will go feral. Bad choices. Bad company. Bad judgement. Hopes and dreams constrained. Futures curtailed.
Children represent a significant financial change. An extra body to feed, clothe, house, and educate. A lengthy commitment regardless of whether the child-raising model applied is do-it-yourself or outsourced to boarding schools and nannies.
Now just for a moment, let’s think about the financial implications of having children.
In aggregate, the costs associated with raising a child to adulthood are vast. Estimates of how large a sum vary. Motley Fool puts the average total cost at over £150,000. For London based families, LV insurance puts that estimate at closer to £250,000.
Those figures are higher than average house prices in some parts of the country!
That cost is spread over 18-21 years, equating to an average annual spend of roughly £12,000. Which is still a lot of money, approximately a third of median household disposable income.
The early years of a child’s life are the most expensive, with child care fees front-loading the spend.
Question is, how many prospective parents run the numbers and think through the financial implications of having a child? I suspect the answer is few. Like many of the important decisions in life, deciding to reproduce isn’t simply a financial decision.
Instead, we do it anyway. Then adapt to survive.
Best case? The £12,000 a year, plus potential fall in household income, is consciously factored in and budgeted for.
Worst case? Prospective parents think with their wallets, switch on the television, and remain childfree.
Most likely? Lifestyles adjust and priorities change to accommodate the new addition to the family.
As is the case with most major life decisions, there is no single right answer, but plenty of wrong ones.
Another common example: uncoupling from an unhappy marriage.
Best case? Relationship recast. Bedroom buddies and joint accounts no more. Pressure eases. A lifelong friendship remains.
Worst case? Mutually assured destruction. Lawyers at dawn. Emotional scars. Financial ruin. Social lives destroyed.
Most likely? Somewhere in between. Wounds raw to begin with, fading in time. A new start for both parties, neither as financially comfortable as they had previously been. But happier for it, hopefully.
Nearly half of all marriages end in divorce. An outcome that has massive financial implications for all concerned. Yet once again, it is a lifestyle decision rather than a financial one.
Dividing the matrimonial spoils may see a couple’s net worth halved.
Diminishing their passive income streams. Destroying their “safe” withdrawal rate calculations.
Living costs potentially double, separate households eliminate the cohabitating economies of scale.
Financial anchors may become attached. Bleeding cash flow and extending time in the workforce.
Losing a paid off owner-occupied home. Sold off when neither spouse can afford to buy the other out.
Despite all of this, we do it anyway. Then adapt to survive.
Best case? An amicable split, each partner departing with the assets they entered the marriage with, half the subsequent communal property, and no further obligations to one another other.
Worst case? Losing a bitterly contested divorce, the family home, custody and access to children, half a pension, and incurring lifelong spousal support costs.
Most likely? Short term financial shock. Medium term financial dislocation. Long term financial setback.
There is an old saying that money can’t buy happiness, but it sure makes it easier to find. Yet for those unhappy with their lot in life, how much would you spend to change that fact? Given the self-help market generates annual sales of over USD$10 billion, I suspect the answer is a lot.
The list of major life changes is potentially endless. Changing careers. Going back to school. Getting married. Getting divorced. Having children. Migrating. Retiring.
Each has major financial implications. Yet few are made primarily for financial reasons. Which is quite telling, particularly against the backdrop of constant financial noise and entertainment that seeks to capture our attention and hijack our decision making.
The optimist jumps in with both feet, trusting that everything will work out in the end.
The pessimist holds back. Fear of potential failure outweighing the chances for potential success.
The realist knows life will be a bumpy ride, and few things will work out as exactly planned. But they do it anyway, understanding that the journey is all part of life’s rich experience. The money stuff can be figured out along the way.
Enjoy the ride, hopefully!
- Denton, J. (2021), ‘Cost of raising a child spirals to more than £230,000 – with inflation-busting childcare jumping 4.3% in a year’, ThisIsMoney
- LaRosa, J. (2021), ‘$10.4 Billion Self-Improvement Market Pivots to Virtual Delivery During the Pandemic’, MarketResearch.com
- Office of National Statistics (2021), ‘Average household income, UK: financial year 2020‘
- Office of National Statistics (2020), ‘Divorces in England and Wales: 2019‘
- Vanier, F. (2021), ‘The basic cost of raising a child until 18 in the UK is £71,611’, Motley Fool