Confidence is preparation. Everything else is beyond your control.

~Richard Kline

The First Rule of Personal Finance and InvestingForgive me for the title of today's article. I usually skip reading articles like this because they inevitably disappoint. The #1 Way to Make a Million Dollars before You're 30. The Only Thing You Ever Need to Know about Investing. Really? Just one thing?

To be fair, I'm sure some of those articles actually offer some interesting insights. For the record, I'm not trying to elicit clicks by using a hyperbolic headline. Let me explain how I came to my idea of the first rule of personal finance and investing.

Family Day Thoughts

We are on the cusp of a holiday weekend here in Canada as Monday is Family Day. This particular holiday is relatively new, but it's quickly becoming a favourite for me. There's no huge meal to prepare or tons of visiting to be done. Expectations are modest, so there's less chance of being disappointed. Most importantly, it's a day to celebrate and spend time with family.

Having said that, an extra day off always makes me more pensive than usual – and that's saying something! 😉 You can spend Family Day doing anything you like, and quality time with family is of course, priority one. But long weekends like this one where there are no visiting rounds to make or fireworks displays to attend are a great time to reflect on where you've been and where you're going. I tend to use them to reset and put things into context – including our finances.

I've been thinking a lot about financial strategy lately because I'm considering getting back into investing in the coming year or two and I'm trying to sort out the approach I'm going to take. You'll recall that I've been mostly out of the markets for a few years due partly to my overall concerns about systemic risk, but more so because we experienced some major uncertainties around our income and we needed to be more liquid for a while. For now, our income has stabilized at a (hopefully) sustainable level.

We will be completely debt free once we pay off our mortgage sometime in 2011. That has us thinking about what to do with the extra disposable income and how to invest it. As I think about all of the possibilities, I keep coming back to the same idea over and over again. (I first came across this concept years ago when I read the Mark Douglas classic Trading In The Zone.)

Anything Can Happen

The idea that keeps repeating in my head is this: Anything can happen. For me, that's the first rule of personal finance and investing. Notice that I didn't call it the best or only rule of personal finance and investing. I don't believe they exist. I've named “anything can happen” as the first rule because it's a great starting point for any financial discussion.

Of course the basic premise is that we can't predict the future. Maybe that's why it's so hard for some of us to construct and stick to a financial plan. There are too many variables and they can change by the month, year and decade. Anything can happen, so why bother?

Let's take a look at how the first rule of personal finance and investing can affect a couple of key aspects of your financial planning:

Budgeting

You can sit down and diligently document your spending and still not hit your budget numbers. Why? Because anything can happen. Maybe you burst through your grocery budget this month because there was a great sale on flour or orange juice and you stocked up big time. Maybe your son scraped the car while trying to get his bike out of the garage. Oops. That wasn't in the budget. That doesn't mean you've failed or that budgeting is useless.

Investing

Is now the right time to buy stocks? How about bonds, real estate, or commodities? If they've been falling for awhile, maybe it's a good time to buy. Or they might just keep falling. If they've been rising for a few months or years, surely we'll see a pullback soon. Or maybe not. Anything can happen.

What Can You Do about It?

I'm sure at least some of you are thinking “Great. Thanks 2 Cents. Now I know that the future is uncertain. Duh!” Although the “anything can happen” concept seems glaringly obvious, I'm amazed at how often I shoot myself in the foot by ignoring it. It's so easy to assume that everything will proceed according to our assumptions. It's amazing how often it doesn't. I've gotten much better about watching for curve balls as I've aged, but there are still those times when I strike out because I just wasn't ready for the pitch.

So what's the antidote? Here are a couple of things I try to remember as I go about my business:

  • Keep an open mind and be prepared for anything. There are no sure things in money or in life.
  • Always make some contingency plans. What if I'm wrong?
  • Don't get complacent or discouraged. Whether things are going very well or not, you can be sure that they will change eventually.
  • A good plan should be flexible, but not flimsy: firm enough to provide real structure and discipline, but nimble enough to adapt to new realities.

All of it comes down to a quote by Jon Bon Jovi that I've used before: “Map out your future, but do it in pencil.”

If you decide to use an hour or two of the holiday weekend to focus on improving your financial situation, I hope you'll start with the first rule and work from there. Most of all, I hope you get a chance to spend some quality time with your family. That's priceless.

Do you incorporate contingency plans into your financial decisions?

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