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Pessimism, optimism, realism: Finding the right balance in planning for the future

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(Read caption) Since the future is unknown, one must find the right balance between pessimism, optimism, and realism.

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So many personal finance choices are based on what might happen in the future.

Will the stock market be strong? Or will it fall again?

Will the dollar retain its value? Will we have high inflation? Or perhaps even deflation?

Will Social Security remain intact? Or will I receive little or no benefits from it when I retire?

Will my health remain good? Will I have children? Will my children be healthy?

Will I get that job that I dream of? Or will I be jobless for a while?

All of these questions (and countless other ones) involve predicting the future – and we simply cannot know exactly what the future holds. No one does. We must make some guesses about the future.

The Optimist and the Pessimist

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Most people tend to be optimists about their future. They believe that they will retain the good things they have in their lives now and will add more good things to their life in the future. “I’ll buy this today on credit because I’ll be making more in a year or two.” “I can save later for retirement because I can always ride the stock market to victory.” “I’ll do that later on, when I’m in my seventies and have plenty of money.”

Some people are pessimists. They tend to believe that the worst is just around the corner and they plan accordingly. Misers are in this group, as are people who live so in the moment that they can’t hold down a steady and consistent life.

I don’t think either side of that coin is a good place to be.

The Realist

Instead of believing that the worst is about to happen or the best is about to happen, I usually ask myself a very simple question.

If a worst case realistic scenario occurred, would I be able to roll right through it and keep on trucking?

I stick to things that might actually happen. What if I were suddenly severely injured? What if a strong bout of inflation occurred? What if everyone stopped reading The Simple Dollar?

If I can’t explain clearly how I would get through that scenario, I come up with a plan for getting through it.

Fortunately, most scenarios in my life are covered. In that event, I plan ahead for that optimistic future.

What can I do today to maximize the chances of that best possible future for me, where I’m completely financially independent of anything that might happen?

In other words, I start out as a pessimist. I look for the scenarios that might actually happen and shore myself up against them.

Once the reasonable scenarios are covered, though, I become an optimist. I put plans in place to maximize my chances of great things happening in my life. In fact, I usually am always an optimist, as I always look for ways to maximize the doors available to me.

To put it simply, I use my money to cover the worst case scenario and I use my energy and talents to build the best case scenario.

It’s Out of My Control!

Yes, many unexpected major events are very much out of our control. That doesn’t mean that we throw up our hands and do nothing about it. That also doesn’t mean that we focus on nothing but that disastrous scenario.

Most of the steps that prevent the most common disasters from befalling us are simple. They mostly involve investments of money, some minor, some larger.

A healthy emergency fund.
Some extra food and water on hand.
Debt freedom.
Life insurance, health insurance, and if you have significant income, long term care and long term disability insurance.
Some form of retirement planning.
Estate planning, including a living will.

On the other hand, most of the steps that pave the way to greater things simply take investments of time and energy.

Eat a better diet.
Get some basic exercise.
Practice good hygiene and grooming.
Learn something new every day.
Practice your communication skills.
Build new relationships and friendships all the time (this is perhaps the most important one).

All of those things are things you can control. You can make the choice to do each of those things – or not to do them.

However, those things build into protection from the problems in life as well as avenues to success in life.

Events might be out of our control or unforeseeable, but methods for protecting ourselves from those events – or priming us to reap the rewards of those events – are things we can do every single day.

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