How to Work Through Financial Complexity

Is it me, or have financial decisions become more complex in the past decade? There was a simpler time years ago, one with fewer choices and limited options. Where you selected to invest, available interest rates, taxes, exit strategies, and cash reserves were straight forward. Today, investors have more choices than ever. Yet, the feelings of uncertainty about what to do next or how to sort out options seem overwhelming. This often leads to inaction and simply managing decisions in the same way they’ve always been handled. Why is that?

The challenge keeping many from achieving what they want is financial complexity. When complexity goes up, decision making goes down. Nobody wants to regret a decision so it’s often easier to ignore and defer to tomorrow.

I believe most investors want to make better decisions now. They want more control and understanding on how their financial accounts, taxes, and cash flow fit together like a puzzle. The image on the box is critical to putting the pieces together. Without it, enormous time, patience, and brain power are used up leaving little room for other decisions.

The key to reducing financial complexity begins by listing out all your puzzle pieces. Label each of your accounts on a single piece of paper. Then, next to each account assign a job description. This may include vacation, college tuition, kid’s activities, home renovation, big ticket purchase, cash reserves, retirement, and reoccurring bills. Finally, list a time horizon next to each account, when exactly is this account needed? For simplicity I like durations of under 1 year, 3 to 5 years, and 10 years or longer.

Now, where exactly is your cash flow moving to in the above accounts? Follow the money and find out. Cashflow drives all stages of life and when purpose and time horizons are absent on accounts, complexity expands. Questions become hazy and answers are less obvious.

Moving the right cash to the right account describes financial plumbing. It takes some trial and error, but with some practice you may ultimately automate money movements. This works great in supporting the under 1 year account/s and 3 to 5 year time horizon BEFORE investing in the long run. Why?

IMO, all investments should be long term, beyond 10 years. If you’ve neglected short-term dollars, friction begins to accumulate. Inevitably, this catches up with you in the form of complexity. What will you do with your long term wealth when short term reserves are necessary and unavailable? Liquidate assets, take a loan, or keep working longer than anticipated?

This can be avoided by treating the under 1 year account/s as the edge pieces in the puzzle. Best to find these pieces first before filling in the middle. The edges are boring, and less fun to assemble, but play a key role. They help outline the framework for the puzzle. Without structure, puzzles or financial decisions become more complex than they need to be.

When investors lead with an understanding of each account, purpose, and time horizon their education expands. No longer is the conversation about returns, FOMO, or selecting the best companies. Instead, actions are intentional to ensure the right dollars are where they need to be. This begins to de-tangle complexity and allow for easier decisions. Over time new challenges will arrive, but leaning on a process you control creates clarity and more choices.

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Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Flowerstone Financial are not affiliated. Cambridge does not offer tax or legal advice.

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