What is 3-Plan Living?

3-Plan Living is a new concept intended to simplify how we manage our money! Ideally, each of us should be able to oversee our financial professional, if we use one. I personally recommend using one as studies show investors who use one perform significantly better than those who don't. If we do decide to handle our own investments, then 3-Plan Living provides a framework for matching your investments to your financial needs.

One of reasons people find managing their finances to be challenging is the lack of an easily understood structure. Without one, we try to do everything all at once, leading to frustration and arguments as needs and ideas conflict!

A Different Approach to "Risk"

The 3-Plan Living concept starts with the idea that all investments perform differently over time. On this website, we use the word Volatility to describe how investments respond to news. For those not familiar with the term, please read our article What is Risk. In everyday life, we use "risk" to describe potential impacts on our desired lifestyle. Volatility is about how investments respond to news, both good and bad. Short-term, volatility is negative for the safety of our financial futures. Considered over the longer-term, higher volatility produces better results when combined with high quality investments!

Let me repeat that! High volatility is GOOD when applied to high quality long term investments! High Risk is never good news!

That's the problem with how Financial industry measures and uses the word "Risk". The current risk assessment only considers short-term volatility. An investment with high short-term volatility is categorized as "High Risk". This rating is applied across all time frames, even if the long-term performance of the investment is consistently good. Such an investment should have a long-term volatility score of Low Medium to Medium, but it doesn't - because there is no such long-term rating available! And THAT's why Canadians tend to save for the long-term rather than invest.

So, what is our perspective on how to structure our finances at any stage in our life? Here are our recommendations...

Rethinking Your financial Plan

If you already have an income that meets their daily living needs, set aside 3 to 6 months income in an emergency fund. This fund should be quickly available in the event of a loss of income. Having the fund avoids needing to borrow money or build up credit card balances!

If you plan to draw down your savings or make a major purchase, your investment strategy should be based on when the need for cash will arise.

Our recommendation is to divide your cash requirements into short-term (less than 2 full years), medium-term (between years 3 and 6), and long-term (cash not needed for 7 years or more) needs.

Each of these time spans has a preferred investment strategy which provides reasonable returns with appropriate volatility for that time span.

It can be just that simple!

The 3-Plan Examples article shows some numeric examples of this concept. Possible investments to consider in each of the three time buckets are discussed in Short-Term Investments, Mid-Term Investments, and Long-Term Investments.