It’s Healthy to Stretch
My friend is a real estate agent.
Come to think of it, I have quite a few friends who are real estate agents, but this particular agent-friend gave advice once that has always stuck with me. He encouraged our other friend – a buyer/client of his – to stretch himself (financially) and buy a little more house than he currently needed.
When I first heard this, I thought it was bad advice and a tactic to sell a bit more house. Looking back, it was not just good advice but great advice for my friend (the buyer).
The heart behind the advice was this simple assumption – your family is going to grow, and your income is going to grow. The extra space will be filled, and the fixed mortgage will become essentially more affordable (a fixed expense being covered by a growing income).
Personally, I could’ve used this advice myself. As our family has grown, we’ve lived in three different homes, all within a 2-mile radius, in less than a three-year period. We have great memories in all three homes, but I didn’t love the moving part of the transaction costs associated with each exchange.
This concept similarly applies to one buying term life insurance. Usually, a planner will size the death benefit based on a multiple of their client’s current expenses. Assuming their lifestyle/expenses will grow over time, and their health rating (which determines the premium) is more attractive at a younger age, then stretching oneself to buy a bit more coverage than they need would be wise. Again, the premium payments are fixed, youth and health result in lower premiums, and changes in lifestyle plus inflation (over time), which means a death benefit based on today’s expenses might not be the right rule of thumb.
The concept we are introducing here is the idea of spending beyond what might feel intuitive at first glance. A very counterintuitive thought (spend more) in the world of personal finance. This is also an appropriate lens for someone to use when thinking about their legacy. I’m defining legacy here as the things one invests in that go beyond covering one’s lifestyle; that may even go beyond one’s lifetime.
Dichotomy
In the phase of life when you are accumulating wealth, the question, “Can I afford it?” can be a dangerous one.
Why? Because the answer may often be yes. Whether that be a fancy car or your monthly dining out budget, I often encourage clients to rephrase this question as, “Should I afford it?” A way of measuring this desired purchase as a trade-off. One doesn’t have unlimited capital, so purchasing this may mean one has to forego that.
This is where a simple order of operations for your cash flow can be helpful. You start with giving; next, you hit your savings targets; and lastly, you have the freedom to spend the rest however you see fit. That annual savings target is specifically defined by your financial plan, a plan in which you choose a target age for financial freedom and then go back into that annual savings target based on the goal age you set. Financial freedom is defined as sufficient dividends and interest (passive income) to cover all of your expenses for your desired lifestyle.
Once you achieve that financial freedom and continue to compound and grow your wealth, you need to re-ask that question, which was formerly deemed dangerous. At this stage of life, no longer an accumulator but now a decumulator, the inquiry of “Can I afford it?” has a much different meaning. In this stage (decumulation), most will find their wealth growing faster than they can spend it. So, one must slow down and get a grasp of how exactly far their wealth could really go.
Dreamstorming
Ultimately, the goal will be to break the financial plan. To test the strength and the limits of our plan by challenging it with large one-time or recurring expenses. Things like funding college for grandkids or buying a lake house or taking an annual European vacation, or, or, or.
I once heard an interview with Brian Chesky, the co-founder of Airbnb, and he unpacked a very interesting business brainstorming exercise. Chesky’s team started by asking the question, “What would a 10-star experience look like?” They blurted out ideas that were lavish, excessive, and, most importantly, unaffordable and unreasonable for the business (Airbnb). They wanted to start by dreaming big, unrealistically big, and then slowly whittle down from there to something both affordable/reasonable and beyond what they were currently doing.
Whether it’s glasses of wine, cups of tea, or beers, you need to start listing some of your financial dreams and legacy aspirations. I’m calling this dreamstorming, and this will provide the ammo to help break your financial plan.
Break the Plan
As I said, the next step will be to load up your current financial plan with these dreams and continue to add more dreams into the plan until you literally break the plan (run out of money). This should be comparable to making a mock bridge in 4th grade and seeing which bridge can withstand the most weight before collapsing. This is work we do in the lab – for the bridge and the financial plan – so that no real damage is caused.
Here at The Bahnsen Group, we always have what we call a base plan. This is the first iteration of the plan and often includes the “weight” of your current spending rhythms placed on the “bridge” of your current nest egg or balance sheet. It’s rare that these base plans don’t pencil with a healthy amount of surplus at the end of life.
So, the next step is to layer on scenarios. These are additions to the base plan. We can ask any “what if” question we want here. What if returns are higher than expected or lower than expected? What if a long-term care need arises? What if I gift each family member some defined amount each year? Again, this is a normal practice and the right work to do. I want to encourage you to take this exercise to the finish line by requesting that those dreamstorm items be plugged in and that you test the limits of your plan. You’ll answer the question of how much you can stretch your money to fulfill your defined desires over your lifetime.
Part of the work you’ll do during and following this exercise will be to prioritize these dreams. Perhaps you can’t do all of them, economics is the study of tradeoffs so you’ll get to choose those that matter most to you.
Ask & Do
This would be the appropriate time and place to bring up a certain pattern I’ve noticed over the years. Clients are often very shy and/or reserved when it comes to requesting withdrawals for items that go beyond their “base” plan. They look at me like a gatekeeper and become embarrassed to ask for their own money.
Let me be clear: I want you to spend your money, I want you to enjoy the fruits of your labor, and I don’t want you to bury your treasure in the backyard. I am your spending advocate, AND I will tell you if I think your bridge will collapse.
So, you can’t stop dreaming, and you can’t stop plugging those dreams into your plan. You then have to ask for the needed funds and go do it. The concept must become an application; it’s the entire reason for the process. Taken to its full measure, we will land at legacy, which is our goal.
Saver to Spender
Coach Prime Time, Deion Sanders, the current coach of the University of Colorado football program, was once a prolific athlete himself. One of the few to play both professional football and professional baseball at the same time.
Deion also accomplished another rare feat by playing both sides of the ball – competing on both defense and offense in the same game. It’s a funny concept if you think about it, as Deion had to switch his brain from do-anything-to-stop-a-touchdown to do-anything-to-create-a-touchdown constantly. He knew the time and place for each; he held these two competing truths in unison, and his legacy is forever cemented in the Hall of Fame for doing so.
You will have a time in your life when you need to temper yourself from “spending it all,” and you’ll have a time in your life when you want to plan out what “spending it all” would look like. You’ll need to be able to seamlessly venture from one end of the spectrum to the other, like playing both sides of the ball. It truly will be a psychological Super Bowl, one worthwhile and one best approached alongside your financial advisor.
Legends > Heroes
I’ll end with this: what we are truly talking about today is legacy. It’s how you will be remembered; it’s how you derive the most joy and purpose out of your wealth.
The hardest part is that I can’t do this for you. I can help, I can ask good questions, but ultimately, legacy is buried in your heart, your desires, and your aspirations. I assume you won’t define this in a single sitting or conversation so that it will be a dialogue over time. It will build on itself, it will morph some, and you’ll pivot here and there as your resources/needs change.
Perhaps this fictional quote from Babe Ruth to Benny “The Jet” Rodriguez in The Sandlot says it best, “Remember kid, there’s heroes and there’s legends. Heroes get remembered but legends never die, follow your heart kid, and you’ll never go wrong.”
Trevor Cummings
PWA Group Director, Partner
tcummings@thebahnsengroup.com
Blaine Carver
Private Wealth Advisor
bcarver@thebahnsengroup.com
