You know that little shutter that surrounds a camera lens? That’s a camera’s aperture. It opens and closes to vary the amount of light entering the camera, determining how much the camera can ‘see.’ Let’s take this concept and apply it to personal finance.
Imagine for a moment that we could only plan our lives in terms of a single day. Anything beyond that - a week, a month, a year – is blocked from our view. This would be the smallest “financial aperture” possible. Let’s think about how it would affect our finances. In this pinhole view of life, all we could say for sure is whether a day’s pay would cover our expenses for that day. This would be fine for food and entertainment. But what about when rent comes due? And what about weekends? Every large, non-daily expense would blindside us. Clearly this is no way to live.
Now, let’s open our aperture a bit so that we can see an entire week at a time. While still problematic, week-to-week planning would at least allow us to budget over weekends, and we’d avoid daily trips to the grocery store. But we’d still be living a life of subsistence.
Let’s let in some more light and consider monthly budgeting. Now we can actually pay our rent. The credit card bills will get paid. We can’t buy our cars outright, but we can at least get a loan with a monthly payment. A relatively stress-free life can be lived planning this way, and in fact many people budget month to month. But what about retirement? What if we want to own a home? Maybe we should open our financial aperture further…
Do you see the pattern here? As we open our financial aperture wider, more and more of our financial lives come into view. With more of the future visible, we can better plan. Here are some benefits of a larger financial aperture:
- Ability to save ahead of time and purchase cars outright, saving thousands in loan interest.
- Understanding exactly what kind of retirement we want. A better understanding of retirement needs makes forecasting savings easier. In rare cases, someone actually realizes that they are saving too much for the type of retirement they want.
- Thinking of products in terms of their life cycles. Instead of buying a car because you can afford the monthly payment, you can instead think of the total cost: the insurance, excise tax, depreciation, and the cost of gas relative to other cars. This is the best way to consider any large purchases that will be used over multiple years.
So what’s the ideal financial aperture? I’d argue the best view to take is the largest possible: of an entire life through working years, retirement, and senescence. This view encompasses every important financial decision we’ll need to make in your life. That way while we’re making our monthly budgets, we’ll be thinking of our retirement needs, college savings, and that house we want to buy. It’s the only view of our finances that is truly complete.
Of course, there’s a reason most of us don’t plan this way. It’s brutally difficult. The same way that an open aperture in a camera can let in too much light and wash out a photo, taking a whole life view of finances can be challenging because the future is so unclear. Also, due to circumstances, not everyone can take the whole life view. The person living paycheck-to-paycheck must, by definition, forego long term planning in order to cover living expenses. At certain times in our lives, our aperture is locked for us.
But we shouldn’t throw our hands up. Instead we should constantly strive to widen our aperture. Financial planning is an iterative process: we prepare the best we can, then constantly adjust as we move toward the future and our financial picture becomes clearer.The best way to start is with our spouses and loved ones. Start talking about the future, as far out as you can manage. Then draw up a plan and point your camera lens at it.