Whether you realize it or not, you likely have a few blind spots in your financial plan. Simply put, blind spots are areas of your financial plan that you can’t see for many reasons, such as your financial background, unique life experiences, understanding, and biases.
I think it helps to take a step back and discuss blind spots more generally to understand this phenomenon:
Have you ever experienced a blind spot while driving?
You’re driving down the road, you turn on your directional to change lanes, you do the “head check” thing to see if anyone is in the lane next to you, you start to ease over into the next lane, and out of nowhere, you’re startled by a blaring horn because there’s a car right next to you!
This is one of the most frightening experiences you can have while driving because you’re left thinking to yourself, I did everything right, and yet I missed seeing that car right next to me!
Similarly, when it comes to financial planning, you may think you’re on track, checking all the right boxes concerning your financial future, making all the right moves, and yet, there could be one or more blind spots that you simply don’t see.
Here are three common financial blind spots that I have seen after working with clients for over three and a half decades:
First, your investments no longer match your risk tolerance.
In recent years, the stock market has provided above-average returns. While this is precisely what we want, it has led to many investment portfolios getting out of alignment and no longer matching the original risk tolerance parameters they were designed for.
For example, if someone started with a portfolio of 70% stocks and 30% bonds, designed to match their comfort level for volatility as well as their investment timeline, but due to the positive market returns, they are now in an 85% stock and 15% bond portfolio, this can be a potential blind spot.
If the market were to crash or significantly correct, this investor could be in for a much bumpier ride than their comfort level might allow for with their 70/30 portfolio.
Often, the best way to remedy this situation is to rebalance the investment account, reducing the holdings of the higher-performing asset class (selling high) and adding exposure to the other asset classes (buying low) to get the portfolio back into proper alignment. As a rule of thumb, investors should plan to rebalance their investments quarterly or semi-annually, though the exact timing will depend on your unique situation.
A quick note on rebalancing: if you are rebalancing a taxable brokerage account, it may be worth doing some tax planning first to ensure that you don’t create unwanted capital gains, resulting in an additional tax burden for the year. However, if the investments are held in a tax-advantaged retirement account such as 401(k), 403(b), IRA, or Roth IRA, rebalancing will not create any tax issues.
Kicking the can down the road or assuming saving and investing will be easier in the future.
I’ve seen many people in their 50’s and 60’s who wish they would have started saving sooner. Unfortunately, they spent their 20’s and 30’s promising to start saving tomorrow, but tomorrow never came.
There’s an ancient Chinese proverb, true in both life and investing, that goes something like this:
“The best time to plant a tree was 20 years ago. The second best time is now.”
While it would always be better to have started saving and investing 20 years ago, the second-best time is today. Rather than continuing to kick the can down the road, assuming that saving and investing will be easier in the future, I always encourage people to begin taking their first steps towards financial freedom right now.
Often, we lose track of how long we’ve been delaying saving and investing, as days, months, and even years can begin to roll together as life passes by. That’s where it can be incredibly valuable to work with a trusted financial advisor: someone that can kindly hold you accountable, helping you recognize this adverse blind spot and implement a plan to get on track.
Failing to recognize lifestyle creep.
Lifestyle creep is the slow but steady increase in your lifestyle expenses over time, and it has a perfectly rational explanation. As humans, we are wired to survive. Because of this, we are driven to pursue more while also ensuring that we fit in with the rest of the tribe.
This need to have more, combined with our need to keep up with the Joneses, can often lead to blown-up monthly budgets or, as Dave Ramsey aptly puts it: “too much month left at the end of our money.”
Now, I think it is important to say that I advocate for my clients to spend money on the things that they value. That’s one of the most critical pieces of financial planning: aligning your spending and your values. That said, I think often we fall into the trap of spending because we see those around us doing it or falsely believe that “more stuff” will automatically result in more happiness.
Most of the clients I’ve worked with in the past have responded positively to conversations around budgeting, values-based spending, and managing lifestyle creep. Still, unfortunately, lifestyle creep goes unnoticed for most clients handling their finances on their own.
One of the best ways to remedy this blind spot is through active budgeting to ensure that your spending aligns with your values and the amounts you were aiming for.
I am here to help.
While driving, we use our windshield to see where we are heading, our rearview mirrors to check where we’ve been, and our side mirrors to make sure we’re staying on track. One of the essential parts of driving, though, is being keenly aware of our blind spots.
While I’ve outlined just three common financial blind spots that I’ve seen, there are many more that can impact your financial situation. As a trusted CERTIFIED FINANCIAL PLANNER™ professional, I work closely with each of my clients to identify and remedy their financial blind spots, all while working towards their ultimate financial goals.
If you’re interested in scheduling a complimentary consultation to discuss your financial situation, schedule a call today!