The Boring Newsletter, 2/9/2025

Hi Friendos,

Today’s newsletter ends with a single recommended personal finance to-do: create a written financial plan. Scoping out your future financial needs is full of uncertainty and unknowns. You’ll still be better off with a plan than without one.

In business school, I took an accounting class called “Financial Reporting and Analysis.” The entire curriculum for the four-month course was studying eight footnotes to corporate financial statements. The pension footnote alone got four lectures. In a traditional pension plan, an employee gets a monthly payment starting at retirement age and continuing until their death. The monthly amount is based on their compensation and how long they worked at the company.

This topic stood out to me because my professor, a seasoned accountant with many publications in prestigious academic journals, said that in his opinion, pension fund accounting is the most challenging area in all of corporate accounting. I remembered that later on when I took a CFO job at a place with a traditional pension plan.

Many corporate liabilities have straightforward accounting because you know the exact amount the company will have to pay in the future. Example: A supplier invoice has to be paid within 30 days and the amount owed is $20,000. Cool, the future cash flow amount is known with certainty and we know the cash outflow will take place within the month. That’s very soon so it is reasonable to ignore the effect of inflation between now and when the payment takes place. In personal finance, I can compare this to paying an electric bill on auto-pay: I used a certain amount of electricity last month at the stated cost, and in a few weeks the electric company will withdraw that exact dollar amount from my bank account.

Some corporate liabilities involve cash outflows that take place over multiple future years. If a company issues a fixed-rate bond, it will make interest and principal payments until the bond matures. The exact amounts of future payments are known and the timing of those payments is known. Although today’s $1 is not the same as $1 in several years, we can look at financial market prices and, using the “wisdom of crowds,” reasonably estimate the effect of time on the value of money. Drawing a comparison to personal finance, we could think of a fixed-rate mortgage where you know the amount of the monthly mortgage payment and the date each payment is due.

Some corporate liabilities, like pensions, involve cash outflows where the amounts need to be estimated. This complicates their accounting. Financial statements need to express amounts in terms of today’s dollars, but sometimes, like for pensions, it is not so clear how to do this because there is no market-traded instrument we can use for comparison. This also complicates the accounting. Here are just some of the estimates required to account for a traditional corporate pension plan:

• How long today’s and tomorrow’s retired employees will live, to determine the time period of future payments to retirees,
• How employee salaries will change over time, to determine the amount of future payments,
• How long employees will work at the company (tenure and turnover), also to determine the amount of future payments,
• The value in today’s dollars of those future monthly payments, and
• The investment returns on the pension plan assets, like stocks and bonds, which help fund those future payments.

That is a lot of unknowns! No wonder my professor thought this accounting was so challenging.

I think planning for personal retirement is even more challenging. It shares some of the same uncertainty factors as corporate pensions and adds even more. Here are some of the factors that impact how much money someone needs to fund their retirement:

• How long they will live (unknown time period of cash flows, nature is wild),
• If they share finances with a partner, how long their partner will live,
• If they will ever need to live in a care facility or pay for home health aides (unknown amount of future cash outflows),
• If they (and/or their partner) will have to stop working due to disability, layoffs, age discrimination, or to provide full-time care for a loved one (unknown future cash inflows),
• The investment returns they’ll get on their portfolio (unknown future cash inflows),
• If they will get married or divorced one or more times (unknown cash inflows and cash outflows),
• If they will have one or more children (unknown cash outflows),
• How much money they (and/or their partner) will make in the future and how much it will be taxed (unknown cash inflows).

You get the idea. Some of these unknowns are resolved over time – most (but not all!) 60-year-olds are pretty clear on how many kids they’ll have. Other unknowns, like the need for a care facility, remain open questions all the way until death. Sometimes life is predictable and sometimes everything changes in an instant.

How to make reasonable decisions in the face of all this uncertainty? Create a written financial plan. You can find lots of online resources for how to DIY this. I like this article and this one that give real people’s actual written plans, and find this thread with detail on other plans interesting and useful. I help my financial coaching clients get their arms around different components of a financial plan, like how to identify the right size for an emergency fund, budgeting for debt paydown and saving, or identifying which retirement accounts to fund first to optimize taxes. To create a solid plan, you will:

• Identify financial goals (examples: have a fully-funded emergency fund, fund my retirement, buy a home, pay for school, pay off debt),
• Translate those goals into specific monthly actions (examples: put $X into retirement accounts each month, put $Y toward debt paydown),
• Play offense and defense (examples: Spend less than you make. Buy the insurance you need),
• Ensure your investments support your goals (example: don’t have money in the stock market if you need it for near-term expenses),
• Discuss all this with your partner or others you share finances with. If you are the more-involved partner, make sure your partner fulfills their role as the financial oversight committee.

After you create the plan, you just need to follow it each month. If you get a financial windfall (hello unexpected tax return!) you know what do because your financial plan covers that. You can review your plan annually to see if it’s still consistent with your goals, and do a review right away if you have a big life change.

I believe that learning about personal finance has about the highest return on investment (of time) a person could ever achieve. That said, if you want to work with a full-fledged financial advisor on your financial plan, I recommend the following: (1) find someone who charges you for their time and advice (like those on the XY planning network), (2) run away from anyone who charges you a % of assets under management (you’ll end up paying way too much if you amass a portfolio of any real size), and (3) make sure they are a fiduciary in all regards (not just when they advise you on investments, but also if they try to sell you insurance).

Creating a written financial plan will bring intentionality and organization to your financial life. It will help you be more successful with your money. Having a plan will reduce your stress; you will know that you are doing what a person reasonably can do to plan for an uncertain future. If things change in an unfavorable way, you won’t experience as much regret: you were doing the best you could with the information you had at the time. Who doesn’t want all that?

-Stephanie