I was recently meeting with a client, and he mentioned that his father pastors their local church. I enjoyed hearing some of the history of the church and his family background. So, being the curious individual that I am, I decided to listen to a recent sermon. The wonderful thing about the internet, right? Instant access to anything and everything.
I really enjoyed the sermon – both the delivery and message were impactful and memorable. The pastor started his sermon out in Ecclesiastes chapter 7. The verse he paraphrased was that God has made man simple, and man decided to make things much more complicated.
What a truth that is. We, as humans, often exchange the simple and the straightforward for the complex and confusing. The finance industry LOVES to do this. Personal finance has its own language and a bottomless chest of tools, metrics, and theories. Most new investors will experience some form of sensory overload when dipping their toe into the world of personal finance.
So much of my job is simply learning to translate the tangled web of investing into a palatable set of truths that clients can both understand and apply to their financial lives.
Inspired by the message from my client’s father, I thought I would explain my simple view of personal finance. I hope the framework I provide you today will help you to (1) assess your own financial life and financial hygiene based on my outline and (2) be able to regurgitate and teach these lessons to the next generation (your kids, grandkids, and/or youthful loved ones).
With that said, here’s my take on personal finance 101.
First, Give
This will sound counterintuitive, but I think the first and healthy step in personal finance is to give money away.
Money is a resource, and a powerful one. Money also has the potential to become an obsession or an addiction. There is freedom in starting with giving it [money] away. Invest in people and causes you care about; place your own spending desires and savings aspirations in the backseat for this first crucial step.
There is a “but” though. If you can’t complete this first step with an enthusiastic and cheerful heart, just don’t do it at all. A begrudging or regretful spirit regarding giving gives money that suppressive authority right back – the exact addiction you are seeking to avoid.
So, give first and give gladly.
Then, Save & Invest
I know we are all eager to spend; to enjoy the fruits of our labor, but I encourage you to give and save first. I want these two steps to be a priority over your spending. I don’t have to tell you to spend, as I know you will. This [spending] is the easiest action for all of us, so let’s eat our main course before we skip to dessert.
Set a target of how much you want to save (e.g., 10% of gross income) and then nudge that spending percentage up each year. There is a term we use in personal finance called lifestyle creep. It’s this ever-so-slight increase in our spending year over year as we make more income. I want you to have savings creep, to creep up your savings rate as you grow your earnings.
Why save? The goal is to make our income irrelevant. That’s a funny way to phrase it, right? But it’s true. We want the income produced from our portfolio (savings) to surpass our earned income – or perhaps better said, our expenses – and then work becomes optional.
Up until the point of financial freedom we will need things like life insurance and disability insurance to protect (or insure) our income for our family. Once we’ve saved enough to where our portfolio produces this needed income, then the insurance coverage is no longer necessary.
This is the simple reason we save, and you can see just how important it is. Note that we save AND invest because investing allows our savings to keep up with the rising costs (inflation) of the products and services we plan to purchase in the future.
But, Don’t Budget
I purposely titled this section for some shock and awe. In my experience, budgeting is burdensome and short-lived. Purchasing decisions come at us fast, and it’s difficult to always be a slave to the budget. I’ve always liked the saying, “Freedom within a framework.” So the concept here is that (1) you give and save first (2) you shouldn’t spend more than what is left over (3) but you have the freedom to spend those leftovers where you see fit.
Do you want to buy that Starbucks coffee every day? Sure, do it. If you like fancy coasters for your house, or you like to indulge in a nice restaurant here and there, be my guest. You have freedom within a framework. That framework is your net income minus your giving and your savings goal.
I will add just one piece of homework to this. I want you to be AWARE of how much you spend each month. So, yes, I’m giving you a pass on budget, but I am encouraging you to track your spending each month. I use a simple tracking tool called Tiller™ to itemize my expenses in Microsoft Excel. I then have a central place where I can see my spending habits across the year.
This habit is much like being aware of the calories you eat. If your goal is to shed some weight and be in a caloric deficit (eat less than you burn), then understanding the calories of that next cookie can be helpful. Awareness drives behavior because we start to make tradeoff decisions. We think to ourselves, “Hmmm, I’ll pass on this because I’d rather have that later.” Again, this can apply to all that we consume – food, products, services, etc.
Good financial hygiene means you know what you spend.
And, Finally, Plan the Handoff
Now, we’ve come to an end. My hope is that you do this part much before you approach the end of your life. Regardless of what one popular book title might promote, it’s very difficult to “Die with Zero.” Inevitably, prudent financial planning with leave your heirs with some leftovers.
Life moves fast. My iPhone regularly reminds me of this truth, as those photo memories show me just how quickly my children grow and change. Those photos of yesteryear are both nostalgic and reminiscent of just how fast life can move. When we save abundantly and invest wisely, compounding forms these leftovers. We need a plan, whether it is basic or complex, on how we hand off this wealth to the next generation and the charities we care about.
Yes, the legal aspects of this handoff are important and necessary, but I want you to focus on legacy and prudence. A sudden windfall of money for a person or an organization can be overwhelming and troubling. You need to be aware of this and think about it.
This image comes to mind for me. It’s a memory from yesterday, actually. I took my one-year-old daughter and four-year-old son to the grocery store. Judah, my four-year-old, really likes to unpack the cart and place the items on the conveyor belt. A site for all those behind me in line, as he is barely tall enough to place things up there. His highest reach is just enough, and most think it’s adorable, but they are also slightly nervous as he heaves a pack of eggs up. The final item was a large watermelon placed at the bottom layer of the cart. He rolled it off onto the ground and chose multiple different weight lifting positions, but the awkward shape and weight made this not possible. In the future, it would be an easy task for him, but at this point, he just wasn’t equipped, although the trial-and-error process was fun to watch. I had to step in and help, he smiled and was thankful then described to me the difficulty.
Many heirs will feel just like Judah. The awkward shape and weight of that wealth will be impossible for them to carry. The responsibility will create some unintended consequences, and we need to be thoughtful about this handoff. These thoughts should not be relegated to pondering on our deathbed; this handoff should be thought of now.
I have seen many different handoffs. One sticks out that I am quite fond of. A client and friend have a family lake house that has been passed down. This wealth (the property) is now being enjoyed by a third generation. This wealth is the vehicle for experiences, memories, and family fellowship. This is the type of handoff that enhances the life of the next generation, not hinders it.
What will your handoff look like? This sort of brainstorming should be happening now, as the crafting of this plan and this handoff should be well thought out. This plan will also be made of clay – you will mold it and adjust it over time to form the legacy that you desire.
It’s Just That Simple
As we started today’s discussion off, personal finance is simple. Its man that’s made it more complex than need be.
You give, you save, you spend, and you hand off. That’s it in a nutshell. Sure, there are strategies and tactics along the way, but this simple framework should be helpful.
For those looking for a book to hand a child or grandchild on personal finance, I just saved you about 200 pages of reading. You’re welcome 🙂
Trevor Cummings
PWA Group Director, Partner
tcummings@thebahnsengroup.com
