Are you an optimist or a pessimist?
You remember what Garrison Keillor used to say about the children of Lake Wobegon, who are “all above average.” Sociologists have tagged this “illusory superiority,” or the tendency we all have to overestimate our positive qualities. CBS News reported on a classic 1977 study in which 94 percent of professors rated themselves above average relative to their peers.
So, most people view themselves as positive, optimistic, capable people. If this is how you see yourself, you are…average (sorry).
But here is a paradox I’ve observed: for many, the more optimistic they are when making their financial plans, the more cautious they tend to be in the financial realities of their daily lives.
Conversely, I’ve seen that when someone employs a healthy dose of pessimism (or caution) in their financial planning, they create emotional space in their financial lives to live optimistically (happily!) in their daily lives.
I think the optimistic planning / cautious (even pessimistic) living paradox results from the nagging feeling in the back of Mr. Optimism’s mind that “something” has been left undone. And the reason he’s got this nagging feeling is that it’s usually true.
When you make your financial plans while wearing rose colored glasses (illusory superiority, remember), you assume everything will mostly go as planned with few significant interruptions.
Optimistic planning assumes you’ll always have a job, earning the same or more than you earn now, that your debts will reduce and your savings rate will increase, that financial markets will climb steadily higher and that you will never make a stupid mistake with your money. Optimistic plans make few (if any) allowances for getting sued, financial setbacks, serious illness, long-term disability, divorce or premature death.
Yuck – that’s not a happy list…
But the truth is that a little time spent addressing the real possibility of such events occurring, and making provision for them in your financial plan, can create a layer of comfort and security that goes with you wherever you are.
And please don’t entertain the silly notion I often hear thrown about that “I could go broke trying to protect myself against every little thing.” OK, yes you could. But that’s not what is being proposed here.
In fact, more likely is your experiencing a huge financial reversal because you didn’t take steps to protect yourself.
By doing a serious evaluation of the big risks in your path and taking steps to protect you against their most significant impact, you give yourself not only genuine protection, but also the peace of mind that can allow optimism to thrive in your daily life.
So, as counterintuitive as it may seem, to live optimistically, plan pessimistically.