“There are known knowns; there are things we know that we know.
There are known unknowns; that is to say, there are things that we now know we don’t know.
But there are also unknown unknowns – there are things we do not know we don’t know.”
(U.S. Department of Defense, 2002)
Donald Rumsfeld was widely ridiculed in the media for these comments, but the truth is that it was actually a very accurate description of concepts of knowledge and risk, in common terms.
Good financial planning is all about risk management, so I actually think Donald could make a great planner (although I suspect he’s already got a fair bit on his plate).
Why is financial planning all about risk management? It’s because we can’t know the future, so the best strategy available is to prepare for a wide range of outcomes. That way you get a much better chance of being able to attain the goals that you have set – things like being able to stop work one day, take a dream holiday, or provide a good education for your children.
So let’s run through a bit of a laundry list of knowledge in financial planning, using Donald Rumsfeld’s terminology:
Known knowns – the things that we actually know for sure today
- Current tax laws
- The total of your liabilities (how much you owe)
- An approximation of your assets (what you own) – it’s an approximation because many assets we don’t know a certain value until we come to sell them
- What your living costs are – if you have a budget in place
- Where you work
- What you like to do with your time
- The current interest rate on cash and term deposits
- The cost of an asset like a share or property today
Known unknowns – the things we are certain that we don’t actually know about
- The value of a share or property in the future
- Whether we will get a pay increase
- Whether your business will be successful
- What interest rates on cash or on loans will be in the future
- Changes to social security or tax rules that haven’t been revealed or even thought of yet
- When exactly you will want to finish work
- When any inheritances will be received
- How long will my retirement investments last once I’ve stopped working?
- Can I afford a car / holiday / house that I want?
Unknown unknowns – the things we haven’t even thought about
- Natural disasters that affect us personally
- Natural disasters that don’t affect us, but have an impact on investments
- How long we (and those we care for) will have good health
- Future changes to the way that we live (how many people 30 years ago saw the prevalence of the internet in our daily lives?)
- Whether we will completely change our mind about what we want out of our lives
This is just a small list that I have been able to come up with. Financial planning means thinking about some of those items and considering, how will it affect my future, and how can I be prepared?
Starting the conversation is half the battle – so email firstname.lastname@example.org today and book an appointment to increase your knowledge, clarity and security!
U.S. Department of Defense. (2002, February 12). DoD News Briefing – Secretary Rumsfeld and Gen. Myers [News Transcript]. Retrieved from http://www.defense.gov/transcripts/transcript.aspx?transcriptid=2636