Financial planning isn’t a buzzword—it’s a blueprint for your future. But here’s something you may not realise: financial planning is path dependent. What does that mean? It means that each financial decision you make is influenced by and dependent on the previous one. There’s a sequence that needs to be followed, just like medical procedures. You wouldn’t start surgery without anesthesia, and you shouldn’t jump into investments without first building a solid financial foundation. If you skip steps or start in the wrong order, you could set yourself up for financial chaos that’s hard to reverse.

What Does Path Dependence Mean in Financial Planning?

Path dependence in financial planning means that the process must be done in a specific sequence. Each step builds on the last, and if you disrupt that sequence, the results can be disastrous. Just as a surgeon needs to prepare before making an incision, your financial journey must start with proper planning and risk assessment before jumping into asset allocation or investment management.

The path includes understanding your current financial situation, defining your goals, assessing your risk profile, creating a balanced asset allocation strategy, and only then diving into investment management. Each decision should be purpose-driven, aligned with your vision and life goals. Skipping any of these steps can lead to cash flow issues, asset-liability mismatches, and emotional, reactive investing based on borrowed tips and hearsay.

Why Following the Right Path is Essential (Before It's Too Late)

Here’s the harsh truth: most people approach financial planning backward. They start with investing based on tips from friends or market trends, hoping it will all work out. But without understanding your financial path—where you are and where you’re going—you’re essentially gambling with your future.

Why does this matter? Because without following the right sequence, your financial plan becomes a ticking time bomb. Asset allocation mistakes can lead to mismatched liabilities and insufficient cash flow, causing stress, frustration, and even financial ruin. For instance, what good is a high-return investment if it locks up the cash you need for emergencies? Or how effective is a portfolio if it’s built around borrowed emotions and fleeting market sentiments, rather than your personal risk tolerance and goals?

The risk is real. Without a structured plan, you’re making decisions that may look good today but could be disastrous tomorrow. Don’t fall into the trap of shortcuts. The path you choose today shapes the financial freedom (or constraints) you experience tomorrow.

How to Get Your Financial Path Right (Before It's Too Late)

1. Understand Your Financial Path: Start with a comprehensive financial plan. This isn’t just a list of investments; it’s a roadmap that includes your current financial position, income, expenses, and debt obligations. Without understanding where you stand, any future step is a shot in the dark.

2. Risk Profiling: Know your risk tolerance, risk capacity, and the risk required to meet your financial goals. This helps you avoid investments that don’t align with your ability to endure potential losses. Your risk profile is the compass that keeps your financial journey on course.

3. Asset Allocation: Once you understand your risk, set up an asset allocation strategy that reflects your profile and financial objectives. Proper asset allocation balances risk and reward in a way that suits your stage in life, financial goals, and market conditions. Get this step wrong, and you could face an asset-liability mismatch or illiquid investments when you need cash the most.

4. Investment Management: Only after understanding your financial path, risk tolerance, and asset allocation should you move into investment management. This stage involves selecting specific assets or funds, monitoring their performance, and making adjustments as needed. Investment management is like the final step of a well-executed plan—it can’t be the starting point.

5. Align With Passion and Purpose: The final piece of the puzzle is ensuring your investments align with your passions, vision, and life goals. A financial plan isn’t just about growing wealth; it’s about growing wealth in a way that allows you to live the life you want. Investments that align with your values not only bring financial returns but emotional satisfaction.

When Should You Start?

The simple answer is now. It’s never too late to reassess your financial plan and make necessary adjustments. The worst time to realize you’re on the wrong path is when it’s too late to correct it. Regularly audit your financial plan—monthly reviews, quarterly evaluations, and annual deep dives—to ensure your financial path aligns with your life changes and goals.

Understanding path dependence before making irreversible financial mistakes can be the difference between a secure future and one filled with regret. The path you take matters, and each step must be intentional.

Do You Know Any Other Field That’s Path Dependent?

Financial planning isn’t the only path-dependent process. Think about careers, medical treatments, or even building a house—each requires a specific sequence. Miss a step, and the entire outcome could change. Are you following the right path in your financial journey, or is it time to reconsider your strategy?