The Psychology of Money Chapter 14: You'll Change

10 years from now, how different will your life be? Will you live in the same place? Spend your time doing the same things? Have the same hobbies/interests? Now think about your life 10 years ago. Did you live in the same place? Did you work at the same place? How did you spend your time? Who and what was important to you? Would or could you have guessed 10 years ago what your life would be like now?

Most people between 18-68 assume that their life will not be very different in 10 years. But when they look back on their lives 10 years ago, who they are today can be almost unrecognizable from their past selves. Psychologists call this The End of History Illusion. In other words, we often assume that our present selves are the end of a long and winding story of how we got here, while we simultaneously expect the path over the next decade to be much less winding than the previous. Remember those rare tail events that have a large impact, but are essentially unpredictable? Those happen in our lives too, and often set the trajectory for our future.

At Brockmann Financial, we often start financial planning with people who want to retire in the next 3-5 years. They feel the desire to slow their pace, diminish their responsibilities, and spend time doing things that don’t return a paycheck. They also want to make sure they don’t have to worry about replacing that paycheck with a mix of Social Security, pensions, and portfolio income. But even if the financial goal most on your mind (retire) is just a few years away, we need to plan for 5, 15, and even 30 years into the future. The difference in someone’s interests and pursuits between ages 85 and 65 is often as large as between ages 65 and 45.

So how do we do that? Do we ask you to predict what your interests will be in 15 years? What vacations you want to go on 10 years from now? Who of importance will come in and out of your life? Nope. We do that by keeping your options open, by not going down a path that, even if it’s the perfect path for what you think you will want, will close all other doors.

Success in our personal finances comes down to how we behave. Housel says there are “two things to keep in mind when making long-term decision decisions”

1. We should avoid the extreme ends of financial planning

2. We should also come to accept the reality of changing our minds

For the first, we maintain moderate savings, moderate free time, a moderate commute, moderate family time, etc. No extremes. For the second, we accept the changes and move on quickly, not giving into sunken cost fallacy (e.g. “I’ve put so much time into this career, destination, home—but it’s not what I want anymore, and I can’t let go because of all I’ve put into it.”)

Let us know

• If your 10-years-ago self could see you now, what part of your life would surprise them most?

• Have you worked really hard towards something and felt differently about it once you had it (whether immediately or after its useful life)?

Until next time, happy reading!