The Powerful Freedom of Good Enough

Let me start off this week’s edition of the newsletter with a truth that will be uncomfortable for at least a few readers.

I firmly believe that most Canadians don’t need a financial advisor. 

The fact is that most of the major financial planning decisions for the average Canadian have been hashed and rehashed over and over again, to the point where guys like me don’t even write about them any longer. Why bother, I say to myself. That question has already been answered.

Besides, most of the financial decisions that the average person makes are pretty straightforward. When presented with a list of pros and cons, most reasonably intelligent people can weigh the options and make a reasonable decision.

The problem emerges after that. Doubt begins to creep in, and folks start worrying about the alternatives. Suddenly, a tradeoff deemed acceptable at the time of the decision keeps them up at night.

This is a major issue in financial planning for the average Canadian, and it’s even worse for the people who eat, breathe, and live money. Despite getting all the major things right, these folks live in fear of running out of cash, having their dividends cut to zero, or some other crazy outlandish thing that will never. ever. happen.

I know this because I was one of those people. I weighed all the tradeoffs and thought about all the issues I could possibly think of before I announced my early retirement. And you know what? None of them mattered.

What I’ve realized a few years into my retirement is this. A pretty good financial plan is just fine. As long as I get the big things right, the small things don’t matter. In fact, worrying about the small things is actually detrimental to the whole exercise, so I shouldn’t even bother.

Embrace a ‘good enough’ philosophy

“Perfect is the enemy of the good.” — Voltaire

I understand the desire to get your financial plan totally right. After all, this is your hard-earned money we’re talking about here.

But the fact is every person makes bad financial decisions every day. If you don’t, you’re some sort of weird financial zombie, laser-focused on savings instead of brains.

I’m the perfect example here. I saved half my after-tax income consistently for 20+ years. It was the most important thing I did towards financial independence.

Whenever I tell people that, I get accused of missing out on life.

But it wasn’t like that at all. I have tons of great memories from my 20s. We played sports, spent time on patios, and had fun while we worked. I continued my education by reading a ton and hanging out with people smarter than me. Plus, I learned a lot about myself, including what I value and what I value in the people I spend time with.

And yes, I made my share of poor financial decisions too. I ate out way too much because I really didn’t know how to cook. I frittered away thousands on various (poor) entrepreneurial ideas — including a hair-brained scheme to sell DVDs on eBay. I used margin to buy stocks before I had any idea what I was doing.

There are probably a bunch of other things, too, which I don’t remember. Which is further evidence that these things didn’t matter.

And yet, I still got ahead. The reason? I got the big things right:

• I kept my housing costs low by living at home until I couldn’t stand it anymore. Then I bought a place and rented out the basement

• I paid cash for a used car and kept my insurance costs low by opting for a higher deductible

• I kept stacking cash flowing assets and reinvested the proceeds to steadily increase my income

Those were the things that really mattered, and by succeeding at them I made my mistakes trivial.

Some ‘good enough’ financial planning decisions

Ultimately, this is pretty much the financial version of the Pareto Principle, or the 80/20 rule. Basically, the rule in a nutshell is you get 80% of the benefit from the top 20% of decisions.

Focus on them, the theory goes, and you’ll do well.

Once one realizes the power of this, you figure out many of the debates we have are asking the wrong question entirely.

“Should you invest in dividend stocks or look for total return?” Who cares. The fact that someone is investing is the important part. That’s the 80% benefit. The rest is details.

The other powerful part of the Pareto Principle is realizing that once you get the big things right, the small things don’t matter as much.

Let’s use my plan to live off the dividends as an example. This is a good plan that has the following advantages:

• It has a very high success rate historically

• Dividends are taxed ridiculously well in this country

  • Especially if they’re your only source of income

• Such a strategy minimizes the number of decisions an investor has to make. You just sit back, relax, and collect your dividends

• Dividends tend to grow over time, which is a terrific inflation hedge

• It leaves assets on the table for the next generation

This is a strategy that gets the big things right. It has various levels of protection. It’s taxed well. It’s proven to work. And it’s simple to pull off compared to many other plans.

But it has some negatives:

• It requires a lot of capital, something that might not be achievable for some folks

• You’ll have to pay some taxes on dividends as you’re approaching retirement

• You may end up with so many dividends that you miss out on OAS

Could you do better than this plan? Maybe! You might be able to predict that the S&P 500 or your favourite growth stock or some other strategy will outperform. You’ll end up with more money and call it a more successful retirement.

But again, this is asking the wrong question. For me, the point of a retirement portfolio isn’t to end up with the most amount of money. What an utterly useless way to keep score. The point is to accomplish your goals. As long as you do that, things are good.

If a strategy is helping you achieve your goals but it comes with some tradeoffs, don’t focus on the tradeoffs. It’ll drive you bananas.

The bottom line

My life got leaps and bounds better when I stopped trying to optimize everything and just tried to make good enough decisions.

I realized the power of a simple, easy to execute strategy like living off the dividends.

I lowered my taxes by using online tax calculators to fiddle with the numbers and embracing simple tax strategies.

I saved a ton of money by getting the big financial things right. I paid cash for cars, bought less house than I could afford, and did what I could to increase my income. The rest was details.

The Pareto Principle did more than just help my financial decisions. It also helped pretty much every other decision, too.

It did so by freeing up my mind to worry about other things. By embracing the fact that I wasn’t going to get every decision 100% right, I freed up a lot of mental energy.

If you struggle with trying to overoptimize your financial decisions, the solution isn’t to find a planner that charges you 1% of your assets to steer you in the direction you would’ve gone anyway. The solution is to stop worrying so much. Make the good enough decision. It’ll be okay.

One more thing

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