Best case.
Worst case.
Most likely.
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.
Reproduction
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.
Uncoupling
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.
Rationalisation
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.
Adapt.
Evolve.
Enjoy the ride, hopefully!
References
- 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
Featured by
John Smith 27 January 2022
My life history: army, university, love, married, had a child. The money stuff figured out along the way. Adapt. Evolve. Survive. Emigration. FIRE discovery. Enjoy the ride. Perspective is a wonderful thing!
Wow, I just copy/paste few words from your essay, to describe ““life happens”.
{in·deed·a·bly} 28 January 2022 — Post author
Thanks John Smith, I should hire you as my copy editor. Chop out all the fat and distill my posts down to tweets!
Sas 28 January 2022
My hypothesis is a fair few people stay together because of financial reasons, living a mildly unhappy life for fear that the alternative would be worse.
{in·deed·a·bly} 28 January 2022 — Post author
That should be the dictionary definition of marriage, once the honeymoon period has worn off.
I suspect you are correct Sas, is certainly true of most married couples I know.
ryangibsonclever 28 January 2022
Almost feels like a build up to something in your writing. You’ve been toeing this line for a few months now.
Shame isin’t it as I get the same from most people I know. Overworked, poor lifestyle happens creating stressors in life. Always seems to come down to spending ‘too much’ time at work.
Thanks for writing another brilliant piece.
{in·deed·a·bly} 28 January 2022 — Post author
Lol, thanks Ryan. You’ll be relieved to hear I’ve just about worked the projection stuff out of my system now. It has been an interesting exercise. Gilded cages are so often of our own making, simple past choices compounding over time, all originating from our own decisions.
What I’ve been exploring is cash flow over time, based on differing scenarios. A simple linear projection produces a reassuring chart, but that scenario isn’t reflective of future plans.
For example, hitting private and then state pension accessibility ages bumps up the available cash flow. That means it becomes possible to run some combination of living larger then and being able to run a larger withdrawal rate between now and then because additional income streams should come on line later. Which in turn may translate into shorter, less frequent, or lower earning regular winter working hibernations.
Another example is that gilded cage. There can be a variant of the poverty spiral, where we choose a living location, build a life around school catchments, neighbours, and school social circles. All make it harder to leave the longer we stay as we become more entrenched.
However, the school tether ages out, which in turn severs the main tie to the location, increasing the range of palatable living location options. Once the kids head off to university or leave home, those choices become infinite once more, as they were in my backpacking days of old.
A move to the beach becomes a possibility, no longer needing to worry about sabotaging my kids educational prospects to indulge my selfish whim. A beach house potentially costs a mere fraction of my current well located big city housing, which in turn greatly reduces my single largest outgoing. Suddenly my passive income streams don’t need to stretch as far, resulting in the spiral starting to spin the other way. My passive cash flows exceed my new living costs, creating investable savings that compound and become self perpetuating.
All imagined, none of it real today. Yet timescale wise it is medium term rather than on the dim distant horizon. Scenarios worth playing around with, lifestyle choices all. None driven by numbers, just a case of figuring out how to make it work.
There was this bloke on the tube yesterday wearing a t-shirt that said something along the lines of “Never forget that to your employer you are just a commodity, replaceable in a heartbeat. But to your family, you are one of a kind and irreplaceable. Prioritise accordingly”
Seemed like a sound take to me.
weenie 28 January 2022
3 divorces in my family, four of my friends are divorced (well, one is still going through hers). I’ve never had the ‘pleasure’ of being married but I did go through the breakup of a 15-year relationship, which had lasted longer than many marriages.
I’ve only observed things from a female perspective – all those divorcees have thrived after their separations, successful careers, grounded kids.The same however couldn’t always be said for the men they left behind. It wasn’t about money/maintenance (in nearly all those cases, the wife earned more than the husband…perhaps that was an issue?) but the women had a strong network of friends who helped them get through the bad stuff and move on.
Breakups are horrid, but sadly they happen and all you can do is try to move on and try to minimise the damage and repercussions.
{in·deed·a·bly} 28 January 2022 — Post author
Thanks weenie. Sounds like you should swap your day job for that of a divorce attorney, you’d reach FIRE in no time!
I suspect you are correct in the resilience of females exceeding that of males. Has certainly been true amongst the widows I know, they generally found a new lease on life. The widowers on the other hand, not so much.
That said, after the fact I doubt there are many folks who aren’t glad to be out of a dysfunctional relationship, be that overbearing parents, spiteful spouses, pointy headed bosses, or bullying school classmates.
Ward Just 28 January 2022
The mass of men (people) lead lives of quiet desperation – Thoreau. Things have changed since then though. I think everyone should have the chance at least to try to be happy. Or said differently, what is wrong with trying to be happy? There are always consequences but it is a high road, challenging and fraught with setbacks.
Frost – I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I—
I took the one less traveled by,
And that has made all the difference.
Sorry for the poetry, thought about them while reading…
{in·deed·a·bly} 28 January 2022 — Post author
Thanks Ward Just.
I loved the irony that the Thoreau quote comes from Civil Disobedience and Other Essays. After he makes you stop, think, and start questioning “why?” his ideas certainly feel subversive! Not wrong though.
Two things always puzzled me about this one back when I read it in high school.
First, why is it often on signs hanging in people’s bathrooms? Something to ponder during those quiet moments of introspection, back in the olden days when people were still capable of pooping without playing Candy Crush on their phone.
Second, we had to write an essay about this poem back in the day. I remember getting eviscerated by the English teacher, who insisted that the title “The Road Not Taken” tells us the bloke looked down the scenic route but continued down the main road, and was writing in hindsight plagued by buyer’s remorse and regret for not venturing down it. My read on it was the author was talking about the importance of journey not the destination, and expressing gratitude for following his heart and heading off the beaten track, etc. I got a C grade, and now that I think about it again for the first time in 30 years, I think I was right, she was wrong, and I was hardly done by.
Perspective is a wonderful thing!
portlygent 29 January 2022
Never read the poem but if he “took the road less traveled by” then surely he did NOT take the mainstream path?
In which case, why tell the tale “with a sigh”, suggesting expected regret?
It’s a puzzle.
{in·deed·a·bly} 29 January 2022 — Post author
A fair question, portlygent. Perhaps from fond reminiscence? The way we might describe our backpacking adventures or first love. I’m sure people in year 9 English have been debating such things since it was originally written!
Bob 30 January 2022
Well I always read it as – Don’t use a barbers with no customers, or dine in an empty restaurant (or possibly a pub with a flat roof, but that’s another story).
Fire And Wide 31 January 2022
I think I fall pretty squarely into the realist bucket – with a healthy (?) dose of optimism generally pulling me towards giving it a go..
Funnily enough your comment above about modelling cash flow is exactly how I came to the conclusion I was ready financially to leave work. I went a bit further in assigning probabilities to the expected future cash flows, e.g. let’s just use 50% of state pension.
The one thing I’ll ‘guarantee’ is that it won’t turn out as planned – but there’s plenty of room to adapt as needed. Which as you know we agree on being one of the fundamental skills to making it all work.
Hope the exercise brought you a glimmer of hope in seeing a realistic path forwards to that beach house. I think it helps so much to know why you are doing what you are doing.
{in·deed·a·bly} 31 January 2022 — Post author
Thanks Michelle. With your ever positive outlook, I’d definitely put you up the optimistic end of the realist range. Is a good place to be.
I found combining potential timing with probability was one of the more challenging aspects.
I’ll use a contrived example to illustrate, a potential future inheritance. The anticipated lifespan remaining of the decedent in unknown and unknowable. Yet the potential pay day may be life changing when it occurs. If it occurs at all, the inheritance could be left to a charity or a beloved pet! There ends up being a two dimensional matrix, one side displaying likelihood, the other timing. The intersection points holding the probability you mention.
The optimist banks on the pay out, taking a bet on the timing, and jacking up their withdrawal rates today because they expect to be financially rescued later.
The pessimist pretends the inheritance doesn’t exist, a nice windfall should it occur, but does all their sums without it being factored in. Withdrawal rates conservative, working longer and harder than is likely to be required.
The realist guesses. There will probably be something at some stage, but the numbers need to be able to work without it being large or soon.
That same scenario could play out over many factors. The end of a marriage. “Failure to launch” children requiring or demanding extended support. The list is as long as our imaginations, it can be all too easy to overthink things… particularly given all these things involve speculating wildly about a future not yet written.
Impersonal Finances 3 February 2022
There are so many twists and turns life can take you down, and in a lot of cases finances are far from involved in the decisions we make. Other times, money is the sole deciding factor. Not sure which is the answer. I suppose it depends on the question. Cheers to enjoying the ride!
{in·deed·a·bly} 3 February 2022 — Post author
Thanks Impersonal Finances.
Any time I’ve made a major decision motivated primarily by money it has yielded a suboptimal outcome. I’ve learned to decide things for the right reasons, then figure the money stuff out after.