There are only three things you can do with money.
- Spend it
- Save it
- Invest it
The media overflows with investment advice and commentary. TV pundits, talk radio, and news specialist discuss almost exclusively the stock market, mutual funds, bonds, real estate, and to some extent hedge funds and other esoteric opportunities.
Our world of communication is filled to the brim with investment advice. So how is the primary focus on investing working? Are you feeling better about your finances today than you did 2 years ago? How about 10 years ago?
It doesn’t seem necessary to cite how much of a mess we are currently experiencing in our country. Bloomberg, Frontline, and Time have done special reports on the failure of the 401k concept and the exorbitant fees charged by management firms and mutual funds.
Overwhelming evidence proves the failure of the for-profit-mutual-fund industry says David F. Swenson in his book Unconventional Success.
None of this should be alarming or new. The data have been around for years, yet why do we as working folks continue to put our money at risk at the expense of basic financial principles each of us claim to know.
Let’s review the meaning of spend, save and invest.
Spend: Having a Spending Plan. Knowing where each dollar is going. The rule of thumb is to give each dollar a rule or the dollar will rule you. A Spending Plan puts the focus on cash flow.
Save: Protected money. Zero to little risk. Checking, savings, cds, money market, life insurance, annuities (not variable), mattress (assuming your children don’t find it).
Invest: Potential money. The potential exists for gain as well as loss. Stocks, bonds, real estate, mutual funds, variable anything, hedge funds, a member in your church who has a great tip, Las Vegas, lending it to a relative.
The Financial Planning industry has been around for decades. They specialize in investing. I recently read a short article found in Discover magazine that cited research conducted on the clients of Financial Planners.
The research found that when a Financial Planner tells a client what to do, the client’s capacity to make financial decisions becomes paralyzed. The difference between a Planner and a Coach is that a Planner tells the client what to do. A Financial Coach teaches the client not only how to make good decisions but how to accomplish what the client wants.
My take: Anytime thinking human beings abdicate responsibility for wealth and happiness to another, they get what they deserve. Very little to no effort is invested into the wealth and happiness today and therefore very little by way of return will result.
We cannot afford to continue down the path on the pursuit of prosperity focusing on the symptoms to our problems. Investing is not the solution. Putting together a sound spending plan and learning how to save your money will outperform investing, it is the path to peace of mind and financial stability.
Within a marriage, learning to set priorities is almost as important as learning to discuss the topic of money. I’ve provided a basic understanding of how money works. Within the courses taught in Trust In Marriage, you can learn how to take the emotion out of money.
In the financial arena, we spend so much time shuffling symptoms at the expense of the root cause, rarely does anybody slow down long enough to study the numbers.
In a recent conversation with a client we discussed the difference between getting a higher rate of return and learning how to save by implementing a Spending Plan.
“I don’t know what you mean, Spending Plan,” Ralph asked.
A Spending Plan is a tool that assigns a rule to every dollar. If not, the dollars will rule you, I explained. “How will dollars rule me,” Gertie chimed in?
How much do you have left over each month after all the bills are paid?
She looked at her husband who shrugged his shoulders, “I’m not sure.”
How much money do you give your children each month? How much do you spend on minor items such as a quick lunch at McDonalds or a 7-11 stop?
We’re not really sure, but it’s not that much. Okay, let’s look at your situation through the eyes of time. You’re combined income is $100,000 a year, is that right? Yep.
You have a financial planner? Yes. How’s that working out? Fine, she averages a decent rate of return. Okay, let’s give her credit for equaling the DJIA for the past 100 years, 7.26 percent.
Now assuming that you are saving or investing 3% of your income, which is the current national average, you will accumulate $435,076 over the next thirty years. That’s good, right? Well it will last you less that two years if you stop working.
Notice what happens if you adjust your spending and increase your savings rate to 10 percent as in the 1970s. However, instead of putting your money at risk in an investment, you put it into safe vehicles that only average 5 percent.
Well that doesn’t make sense, how is 5 percent going to outperform the DJIA at 7.26 percent?
Your balance is now $994,704 or $559,628 more money just by putting in a plan of action.
That’s interesting, but why don’t we just get a higher rate of return? Okay, let’s bump your rate of return to 10 percent under your current spending plan. Here ya go, now you have $286,517 less.
In other words, a 10 percent rate of return with risk, will have a more that a quarter of a million dollars less than a 5 percent return with a Spending Plan that puts more money into a safe vehicle.
So you mean, we don’t need to risk our money? Well what I’m saying is first things first. Get yourself our of debt, organize a Spending Plan, increase your savings amount, and when you can afford to risk your money, get the best Financial Advisor you can find.