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Why You Need to Get an “Outside View” on Your Finances

In our lives, we all take the inside view. Unfortunately, the inside view is quite flawed and more often than not leads us astray. And that is where the outside view comes into play. Seeking the outside view in various aspects of our lives is thus beneficial. But getting an outside view can serve a particular benefit when dealing with our finances.

But how does it work?

What is the inside view?

The inside view is basically our narrative and perspective as we go through our lives and plan things.

outside view finances

For instance, as Selenid and I created our written financial plan, it was created via our “inside view.” We planned based on our unique experiences and perspectives. As is common, we did not necessarily consult norms or normative data.

This is how most of us plan things. Doing a home renovation? We plan according to our estimates, not consulting averages of how long average renovations take or how much they cost. As a result, the inside view often leads us to be overly optimistic about our planned path. These misguided expectations can then wreck havoc in our success and follow through. It can lead us to pursue something that is not worth it (sunk cost fallacy) or to give up when we shouldn’t because something is taking longer or harder than we expect.

And we combat the inside view with the outside view…

What is an outside view?

The outside view is essentially an outside perspective.

For example, before beginning to plan a home renovation, an outside view would consist of researching average over-estimate costs and time frame for similar renovations. It could also consist of talking to someone who went through a similar renovation.

We all like to think that our situation is unique and will go better than average. But by rule, most of us will experience things according to the average. So we should at least consult normative data when available.

We can then always adjust our estimates based on any unique circumstances. But it needs to be based on the solid foundation of the normative data.

Why do we ignore the outside view?

It seems obvious that we should seek out and listen to an outside view in life when we spell it out like this. But we rarely do it. It’s just not natural.

When confronted with cold, boring statistics versus a compelling and personally related story, we immediately ignore the stats and lean into the story.

It’s just the way our brain is hard-wired.

Additionally, those whom help us plan are often externally motivated to feed into our inside, overly optimistic view. For example, the contractor we hire for our home renovation is motivated to provide an overly low estimate. He or she knows that you are unlikely to leave the job unfinished rather than pay more money later on.

Combine these two factors and the outside view becomes a very unnatural and uncomfortable thing to seek out. So we naturally avoid it without even noticing that that is what we are doing.

We tend to just accept the inside view subconsciously…and this is a problem.

The issue of not having an outside view

You can probably imagine a myriad scenarios where the lack of an outside view in relation to your finances would be a major problem.

But we will examine this broadly…

Let’s again remember the basic formula for growing wealth and advancing along the path to financial freedom:

Wealth = Growing and investing the margin between what you make and what you spend

For most of us, every part of this equation can be mistaken when only an inside view is available.

Growing the margin without via the inside view

In general, most physicians will overestimate how much money they will make over their career. We also tend to overestimate the length of our career – or rather the length that we want our career to be…Burnout, disability, or other issues arise in physicians’ careers at a way higher rate than we acknowledge or think applies to us.

People is general also way overestimate the amount of money they think they are saving or are capable of saving. That is why restrictive budgets just don’t work as I talk about here.

Lastly, we underestimate how much debt we are willing to or will take on.

Less income, more debt, and a lower savings rate leads to less growth of the margin to build your wealth. But it is really the last part of the wealth equation that doctors mess up due to a lack of a true independent outside view in their finances.

Investing the margin via the inside view

Doctors are – how should I say this – not the most humble people. Myself included. We are proud. And we think we are smart. The problem is the halo effect. We are smart and good at medicine. So we think we are smart and good at other stuff too. Like investing.

We know that 80% of active investments fail to beat the overall market average – represented in passive investments like broadly diversified index funds. However, instead of accepting this base rate and using it to our advantage, we think we can be in that 20%. Or that we are so good at judging people that we can find a “money person” to beat the average.

Even though study after study shows any sort of long term success with active investing is just not possible…

The danger herein comes because doctors tend to overestimate how much their investments will grow. This becomes a double edge sword because, as a result, they:

  • Save less thinking that their investment return will make up for a smaller savings rate, and
  • When their long term return is much less than expected, it is often too late to create such a larger savings rate that would be necessary for catch-up

So, what happens? Doctors work longer than they want, are less happy, succumb to burnout, and provide worse patient care.

The inside view presents some problems…

How doctors can find the outside view for their finances

If the lack of an outside view is the problem, the solution is simple: find a reliable and trustworthy outside view for your finances.

This does come in two parts:

  • 1. You need to find an outside view
  • 2. But you also need to make sure it is reliable and valid. An outside view that points you in the wrong direction is just as potentially harmful as relying solely of the inside view

So, I’d like to end this post with some definitive and actionable steps to utilize the outside view to strengthen your course to financial freedom and well-being! Because, I said earlier that Selenid and I used the inside view when creating our written financial plan. But this is only partially true, because we used a ton of outside resources, even consulting an old financial advisor, as outside views.

Here are some great ways to utilize the outside view to your advantage!

What do you think? Has the inside view impacted your life or your finances? How? Did utilizing an outside view help? Let me know in the comments below!

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    Jordan Frey MD, a plastic surgeon in Buffalo, NY, is one of the fastest-growing physician finance bloggers in the world. See how he went from financially clueless to increasing his net worth by $1M in 1 year and how you can do the same! Feel free to send Jordan a message at [email protected].

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