We’ve written previously about the concept of goal-based investing and the fact that every plan to achieve a financial goal shares four common ingredients: a time horizon, current savings, future savings and investment returns.
We believe that reaching financial goals shouldn’t require anyone to become a financial expert. There should be a straightforward strategy for financial planning that anyone could master.
That’s why we invented planning with points. Here’s how it works.
Planning with Points
Points are a device to keep score on a plan. When a plan has 100 points, it is expected to succeed.
You start with zero points and every time an ingredient is added, points are earned. You keep adding ingredients until you get as close as possible to 100 points.
For instance, add a year to your retirement plan and you earn points, let’s say 6 points. Add $1,000 of future annual savings to a college savings plan and get 3 points. Add five percent stocks to your investment portfolio and you may earn 4 points. Or, add $10,000 to current savings and earn 2 points.
Why do these actions earn points? Let’s take the retirement plan example. If you add a year to your retirement plan, you’ve given your savings more time to grow and yourself one more year to save.
In other words, you are now closer to your goal, which is translated into points earned toward the total goal of 100.
Plan Points put all four ingredients on the same playing field and take the difficulty out of making choices around the tradeoffs you could make in your plan.
Understanding a Portfolio in Terms of Points
Plan Points also make it easier to understand and choose an investment portfolio.
We know that investments can be confusing. Therefore, we think a plan should start with a simple portfolio of US Stocks and US Bonds.
The return on that portfolio – the amount by which that portfolio could help your money grow if you invested in it – is translated into points earned toward your goal of 100.
Stocks generally have more return than bonds. So, add more stocks to your portfolio and that portfolio could earn more points. But be aware that stocks also have a higher potential than bonds of losing value.
Therefore, while adding more stocks to your portfolio may gain you more total points, it also puts more points at risk, meaning there is a possibility that you could lose points. We’ll talk more about putting points at risk in another post.
Because there is the possibility of putting points at risk, rather than adding more stocks to your portfolio, you may want to earn those same points with different ingredients like time or savings.
Increasing these ingredients without changing the portfolio could earn you the same number of points as adding stocks would have.
It’s that simple.
A Powerful Planning Framework
Yet, as you’re experimenting with different combinations of ingredients to earn points, behind the screen are cutting-edge algorithms calculating exactly how many points one more year or one more dollar of savings is worth.
Our app, Lasso, does the hard work, so you can keep it simple and build your plan based on your preferred mix of ingredients.
Our system of planning allows anyone to build a plan for a financial goal. Simply start by stating your goal and then express your preferred mix of plan ingredients until you reach 100 points.
It’s powerful, simple and doesn’t require you to become a financial expert.
But what happens if you can’t get your plan to 100? How can you fix it? Or on the flip side, make your plan even better so that it’s easier to get to 100 points?
Share it with an expert and let them create points for you. To learn more about how experts can earn you even more points, read our post on the real value of a financial advisor.
Are you ready to try out an easier strategy for building a plan for your goals? Click here to download Lasso