We’ve all been told to “think long and hard” about something. It may conjure up a long-forgotten childhood memory of a parent’s sternly worded reprimand for an antic we had done while contemplating doing it again not knowing the possible consequences. Or maybe it’s even you lecturing your own kids.
Thinking long for investing is statistically more effective than short-term stock picking and active trading.
Some of our most life-altering decisions were a result of thinking long but we don’t always get an opportunity to carefully evaluate how a decision will affect our future because life just happens. Or we didn’t want to think about it or deem it important enough to think long and hard about it.
You can begin to think long for when you want to do something else. It’s another aspect of the obscurity of the other side that is rarely addressed. It will shift your focus from living life in weeks and months to envisioning it in years and decades.
I didn’t think long on leaving a lifetime career, a life-altering decision and the ensuing consequences. I ended up doing that after the fact. And sometimes you aren’t given a choice and have to think long after a decision has been made for you.
Many people live on a week-to-week or at most month-to-month basis as that is how they are paid. This can translate to retirement income with a monthly pension or 401(k)-type payment and monthly social security.
However, not everything pays out on a monthly basis, and the only option is annually. Thinking in years and decades requires a mindset shift and planning. When my husband was contemplating doing something different, the first several years would be based on annual payments.
This shifts your mindset from what you need monthly to what you need annually. It also requires a level of discipline or restraint to keep that annual payment in a high-interest bearing account to cover an entire year and not just a few months. Some learn how to do this because their job forced them to being based on commissions rather than a recurring, predictable paycheck. For others, this could be a challenge because they have never managed money this way.
In order to get to an annual amount, you need to look at both your monthly and annual spend. I didn’t do this for us until after we moved from California and had established a solid baseline of where we wanted to live for several years if not decades. It requires thinking how property taxes will be paid after your mortgage is paid off and for us that is a significant amount. It will also force you to think about what else you want to do and what costs will be involved.
By going through all your credit card statements and automated payments for an entire year, you will find things that you no longer need and other things that you would rather have. Automated payments are an amazing technology innovation, but you can lose sight of what you are actually paying for and whether it is worth it.
At one point it likely was worthwhile, but things change and we change. A financial planner can model your retirement based on numbers in your 50’s or 60’s for your spending at that point in time but that will change in your 70’s, 80’s and 90’s. Here is where thinking long in years and decades becomes important.
When I modeled out our spend in our 50’s – 60’s, I used it as a baseline to model it again in our 60’s – 70’s and then again from our 70’s – 80’s+. Medical spend will change, hobbies and travel will change, where you live may change including the high property tax payments.
The month-to-month recurring spend that you have managed since your 20’s becomes insignificant and the large amounts, that could be only one-time become far more important. In order to identify those significant large amounts, you need foresight of what those will be or could be in your life.
And that requires thinking long.