How to Financially Plan for Goals to Change

This article is an excerpt from the Shortform book guide to "The Psychology of Money" by Morgan Housel. Shortform has the world's best summaries and analyses of books you should be reading.

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Have your life goals changed over the years? Do you have the same goals you did 10 or 20 years ago?

A fact of life is that goals change over time. However, people often deny this fact and try to plan for the future as if nothing will change. That’s why Morgan Housel, the author of The Psychology of Money, says that you should make a financial plan that is flexible.

Here’s why you should have finances that can change with your life.

Expect Your Future Goals to Change

In The Psychology of Money, Morgan Housel shares one critical key to developing a long-term strategy you can stick to over decades: Expect your future goals to change, react quickly when they do, and build flexibility into your financial plan.

As we’ve seen, one major element of financial success is letting your money sit as long as possible so it accumulates the maximum amount of compound interest. Housel posits that leaving your money alone for this long is difficult partly because people change, but since they’re unable to predict how they’ll change, they don’t invest their money in ways that will work for their future selves.

Housel explains that when making financial plans, most people fall victim to the end-of-history illusion, a psychological phenomenon where you recognize that you’ve changed significantly from who you were, but you don’t expect to change significantly from who you are now. But in reality, you are likely to change just as much in the future as you did in the past. For example, if you’ve changed your career twice between 20 and 30, you might recognize that you’ve changed significantly since 20, but you expect that you won’t change your career again for the rest of your life.

(Shortform note: Why do people fall for the end-of-history illusion? The psychologists who discovered the end-of-history illusion (which they also called the end-of-history effect) suggest a few possibilities. One is that believing you don’t change is comforting: It’s terrifying to imagine that, for example, your future self is so different from your current self that any plans you make now—both financial and otherwise—won’t work for them.)

How can you reconcile the reality that you’ll change with the necessity of leaving your money alone?

Housel makes two recommendations.

#1 Don’t Make Extreme Financial Plans

Specifically, Housel recommends avoiding any plans that involve extremes in your commute, savings, or personal time, and creating plans that involve moderation in all three areas instead.

(Shortform note: What exactly counts as extremes in your commute, savings, or personal time? Housel never defines this, and what counts as moderation in all three will likely differ drastically depending on your age, location, and personal location. So instead of comparing yourself to others not in your situation, consider going with the options that feel moderate to you, even if they don’t align with what is actually average.)

Why? First, Housel explains, if you make an extreme financial plan, you may regret your choices. For example, an entrepreneur who devotes 100% of his time to building his company and zero time on his relationships may be happy in his 20s. But he may regret this decision at 45, when he’s financially successful but has no loved ones to share this success with.

(Shortform note: If you do make an extreme financial plan and end up regretting it, one way to ease the pain is to find the silver lining: Learn something from the regret and apply it to your actions in the future. That way, even if you don’t get your new goal, you won’t feel as badly. You’ll also likely feel less stressed about having to work harder for your new goal because you won’t consider the time a total waste.)

Second, Housel states, if you make an extreme financial plan and change it later, you won’t be able to take full advantage of compound returns. For example, you may believe that you never want to settle in one place and thus happily survive off part-time jobs that pay just enough to let you travel the world cheaply. But if you eventually tire of traveling and want to settle down, you may discover that you can’t afford to retire where you want. Had you taken slightly better-paying jobs and saved some money, you would have a decade’s worth of compound returns—but you can never get that money back now.

(Shortform note: Remember that you may change your financial plan not because you want to but because you have to. If this happens, you may be more exposed to financial ruin if you’ve been following an extreme financial plan than if you’d been following a more moderate one. This is because extreme plans can help you achieve one goal but can leave you vulnerable to things going wrong in other areas of your finances.)

#2 Allow Yourself to Change

When your values and goals inevitably do change, Housel recommends, accept this change and adjust your strategy accordingly as soon as possible. In doing so, you minimize the effects of the sunk cost fallacy: our tendency to stick to choices we made because of the effort we’ve invested in them, even though we can never get that effort back.

If you fall victim to the sunk cost fallacy, you might, for example, spend years being miserable as a lawyer because you already invested three years in law school. But law school is a sunk cost, or an investment you can’t recuperate: No matter what you do, you’ll never get those three years back. The faster you admit that you’re miserable and change your career plan, the less time you’ll spend being miserable as a lawyer.

(Shortform note: Refusing to change your current actions due to the sunk cost fallacy doesn’t just affect your finances; it can also lead you to stay in an unsatisfying relationship. In The Defining Decade, Meg Jay notes that sunk costs have an especially strong hold over people who’ve chosen to move in together before getting engaged, because it becomes harder to extricate themselves from things like shared bills or pets.)

How to Financially Plan for Goals to Change