The Best Way to Approach Personal Finance

There are fundamentally two ways to approach personal finance: bottom-up or top-down. 

Implementing a top-down approach means placing an emphasis on financial goals and saving/investing in such a way to meet these goals. The goals are at the forefront and financial discipline is used as a tool to achieve them.

Someone with a bottom-up approach, however, begins by building a personal finance structure and worries about the fruits of their labour later. Goals? Who needs goals? The emphasis is on building good habits – what you actually do with the money is secondary.


As you should have internalised by now, top-down is all about goals. Let’s take the example of saving for retirement. A top-down approach would involve calculating how much you would like to live off in retirement and using this number to calculate how much you would need in your pension pot when you come to retire. From here you can calculate then how much you will need to save/invest each year to arrive at this value (and retire happily).

The advantages of such an approach are fairly obvious. The main benefit is that it gives you something to work towards. It gives you a reason for why you can’t go out this Saturday or why you and your boring boyfriend-soon-to-be-husband decided not to go on holiday this year. This keeps you motivated.

It also prevents you from falling into accumulation traps. Don’t know if you should save more or spend? Look at your plan. If you’re on track – spend away. If not – no spending for you. This helps prevent you from slipping into a common personal finance trap: an obsession with saving and an inability to splash the cash or enjoy yourself at all. You don’t want to be the guy with 7 figures in the bank who still drinks carling tinnies, even though you don’t like the taste, just because they are marginally cheaper. Trust me. A top-down approach allows you to place every decision within a solid framework.

This framework, however, can cause problems. Solidity is typically accompanied by inflexibility. It’s hard to change your mind whilst operating within this system and the consequences of doing so can be severe. If you are investing for some goal that is at least 10 years down the line your investment approach might be incompatible to a decision to sod that off for a goal that you need the cash for next year. It also allows for very little experimentation and exploration of the investment landscape to capatalise on opportunities, real or perceived. Your plan dictates you must stick to a rigid investing agenda – highly risky investments are typically not on the cards.

The FOMO that can result from this is not the only psychological pitfall, either. A rigid top-down approach can give you a false sense of security, especially if your assumptions are slightly off. You may wake up one day and whilst browsing your financial plan excel sheet you realise that you actually have not been saving enough over the past 5 years due to weak financial market performance. As we have already seen, life gets messy very quickly and small changes in input parameters can have a material impact on outcomes.

This can be fixed by checking/adjusting your plan frequently and/or setting pessimistic expectations of exogenous parameters. But using pessimistic expectations can lead to over-saving. How many personal finance nerds, I wonder, over-saved and wished they had spent a bit more when they were younger? Ambitious goals can lead to over-investing, too. Chasing returns is a fool’s game and using ‘required return’ to make investment decisions can lead to disaster.


If a top-down approach is about outcomes, then a bottom-up approach can be characterised by its emphasis on process. This method focuses on allocation. What % of your income should you be paying in rent? What about total expenses? How much should be going to your savings account? What are sensible assets to invest in? A bottom-up approach seeks to answer these questions.

The main benefit of this style is its simplicity. Once you work out how to allocate your income, what products to use, and what to invest in, you’re pretty much done. It doesn’t require the same level of monitoring that a top-down approach does. It also isn’t associated with the same level of stress as a top-down approach. Top-down Tom wakes up every day wondering if he is going to meet his goals or not. Bottom-up Betty doesn’t have these concerns.

This simplicity arises from the fact that no calculation is required. There are no (mandatory) spreadsheets, projections, or forecasts. This means that someone using bottom-up isn’t subject to the pitfalls of being reliant on such calculations. The lack of a rigid plan also allows Betty and others who follow this path to be more flexible. One might allocate 5% of income to a ‘fun money’ pot or a ‘moonshot fund’. This money can be channelled into whatever you like, giving you the chance to get lucky and ensuring you suffer less psychological attrition.

Bottom-up is looser. Much looser. It involves waaaaay more uncertainty (both real and perceived) which some may not be able to deal with. These types of ‘special’ personalities may actually prefer the constrictions of a rigid schedule. This comes largely from the biggest weakness of this approach: you don’t know if you’re saving/investing enough. The only way to ascertain an answer is via calibration: perusing Reddit; asking friends; thinking about your spending; considering what you want out of life; etc. all have to be inputs in this calibration which will ultimately remain a bit of a guess.

Get this wrong at your peril. Poor calibration can lead to bad decisions. If your friends refuse to save, for example, you could be chuffed with your monthly £50 in savings when in fact this is probably painfully inadequate. With nothing to aim for, some will simply attempt to maximise their assets. Some people, lacking purpose and intrinsic motivation, need some kind of metric to aim for to “win” and measure their “success” by. Total assets becomes this measurement for many and hence, without specific goals, many fall into the trap of accumulating as much as possible and not actually living life. Others may go the other way: without the motivation of specific goals to work towards, saving becomes an afterthought.

A little from Column A, a little from Column B

As with most things in life, when two diametrically opposed viewpoints both seem reasonable, the truth is probably somewhere in the middle.

Goals should be primarily used as a reality check, and as motivation. They are good for calibration – it’s fun to see how much one would need to save each year to meet some specific goal with some specific input parameters. Playing with worst case scenarios can also give you levels of saving that you probably don’t need to exceed.

Top-down also works very well over short time horizons. As the time line decreases, so too does uncertainty. A 65-year-old retiring in 5 years time that needs a certain amount in their pension pot to be comfortable in retirement fucking better set a goal and stick to it. If you’re going to need some €€€ for your trip to Berlin in 3 months time – this goal needs to be saved for.

But this approach ultimately fails to overcome the problem of uncertainty over long time horizons. A 21 year-old implementing top-down to save for retirement will probably be exposed to a whole lot of stress, their calculations will be wrong, and they will also miss out on opportunities (and maybe life in general) by following a rigid structure. This is why I generally favour bottom-up when dealing with investment horizons such as these. In these circumstances, bottom-up combined with heuristics is the best approach.

What do you think?

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