Why?
From Carl Braun via Farnam Street:
"Most people write to sound smart when they should write to be useful.
Communicating to sound smart lowers your potential for impact. The harder people have to work to understand you, the less they want your input.
Writing to be useful means writing what you would want to read. Simple, but not easy."
Health is part financial, physical, spiritual, and mental. Therefore, if you want to be healthy, you want to be financially healthy. This sounds simple, and I think it is. Easy? Oh heck no. Financial education in this country is, for the most part, abysmal. Few people, if any, are born with savings behaviors. We are by nature twitchy beasts who respond to the fear of the day. Long-term financial health is, generally, not part of the fear of the day until most people reach, at earliest, their 40’s, and for most, late 40’s to early 50’s (at least in the United States). Most everyone is capable of becoming exceptionally healthy. Few become truly healthy, with the majority of Americans worrying about their ability to support their lifestyle long into their non-working years. We have worked with many clients who feel the need to support their parents, for example. There is plenty of suffering as a result of financial health worries (see causes of divorce, among other other things). I would like to see most people become financially healthy - because most can.
So How Bad Is It?
Source: Fidelity
You might see this as 54% green. What is wrong with that? I encourage you to read the fine print: “are likely to be able to cover at least their essential expenses.” I do not know of a single client who calls this financially healthy. Additionally, retirement readiness/preparedness surveys are heavily influenced by current economic conditions.
There are certainly studies that indicate financial health in our country is good. I will not refute them. I know from experience, recognizing that I am dealing with a relatively small sample size, people in general are not at all skilled in accounting for their spending, much less forecasting their spending. I am a firm believer that the Forecasters’ Hall of Fame has zero members. We perform an exercise with every client, whereby they assemble a spending plan, we model their cashflow, accounting for taxes, cost of group benefits, and existing, provable savings to save (401(k) plan contributions, for example, versus savings to spend). This results in a modeled, expected cashflow. The look we get from first-time clients when we demonstrate what they “could” or “should” be able to save (it is a model, so it will for certain have errors) can be priceless and at times, sadly, fearful.
On My High Horse
No, my horse is not high (see the meaning here). I wish someone had taught me these simple principles when I was first on my own. Sure, accuse me of talking my book. In self-defense, read my Twitter or LinkedIn. I bet I have repeated these hundreds of times. To me, they are financial truth, the most powerful financial health actions you can take. Barring incredible catastrophes, applying them will work.
Here are the rules of long-term financial health (of which the definition is solely up to you. I know financially healthy people with net worth of $100 million, close to $0 (think pension income), $500,000, and everywhere in between. I know unhealthy people with the exact same, current financial circumstances):
Pay yourself first - save first and spend the remainder. This forces you to spend less than earn, and more importantly, live on less than you earn. You get used to a lifestyle that is than what you could “afford”, afford meaning right now, today, if you spent it all. Barring outside agency, most will spend it all, no matter how high income rises. Your spending expands to fill your income, just as a gas expands to fill the container. Make the container smaller than your income.
There is no set rule for the amount to save. That is unique to you and what you want to accomplish. For those of you who must have rules, 10% is a good place to start when you start working, 20% if you wait for 10 years, and a whole bunch more depending on how far past that you delay.
Keep a current definition of what financial health means to you. Update your definition when you and subsequently it change. To me it means being able to do what I want, when I want, with who I want, for as long as I want. I first heard this from Ted Klontz. It is something that inherently makes sense to me. It is what I have chosen to aspire to. Your definition may well be different.
This is far different than my youngest vision. When I first went to work (driving an auto parts delivery truck in 1974), my vision was I wanted to own a home. That felt like wealth/financial health to me. I had never lived in one place for more than a few years. I understand now that I needed to establish consistency and roots, which I had never had in my life to that point. My vision has changed significantly in the intervening years, from owning a home to having a cash reserve to having an investment account and other material things to, essentially, having total control over my time. Your context is incredibly important.
Translate your definition of health into a savings plan. Determine how much you need to save, so that you can pay yourself first with some reasonable probability of success. In my opinion, this is why everyone needs a financial plan - to figure this out.
In tandem, translate your definition into a spending plan. Be intentional about what you spend and why. I am not advocating frugality, although, if that is a source of happiness for you, have at it. Spend on those things you need to and want to, bounded by what is left after you save. Financially healthy people always think about, in their financial life, saving first, even when they are not capable of doing so. There are, without question, times in life when you may not save, either because you cannot or because you make a different choice. Make that choice intentional. Set aside fun money of some amount. If you are not enjoying yourself, it is nearly certain that your plan will fail. The brain has a habit of getting you to stop doing things that are unenjoyable.
Maintain a no-purpose cash/cash equivalent reserve. This might be three month’s expenses, it might be three years. You should be comfortable answering the question: “Can I handle whatever comes along?” You should ask yourself this question at least once per year.
Systematically invest, every single month. Be consistent. It does not need to be complicated. It needs to be repeated.
Invest your long-term funds in a strategy that is statistically likely, over long periods (20 years or more unless you’re around age 80 or older, and 50+ years for many of us) to grow the principal net of all investing expenses and fees. There is no “right” strategy. Rebalance to your strategy once a year.
Roughly 5 years before you plan to stop earning an income, devise a specific plan for generating your income. I advocate income planning to live to age 100 at least. Here’s why. If you make it to 65, especially if you have a long-time spouse or equivalent, one of you has an excellent chance to make it to age 90+. If you make it to 90, your life expectancy is 3.6 years. Who the heck wants to be broke at 90+? Or be 94 and then not be dead, but broke? I call that poor planning. Guess what? Your genetics/family history are a relatively small part of longevity. Diet, physical movement, education, continuing brain work - all are more influential than your family history, on average. Plan to live a lot longer than you think.
Your Money and Your Brain (H/T Jason Zweig)
You are not just facing the financial problem at hand. You are dealing with your current tribe, other social influences, your upbringing, your past and current economic state, gender, culture, desires, and your current and future view of yourself. These are by no means all of the factors. Our history as humans, many of our current cultures, our parents, our crew, businesses that want to make a profit - they are all working at odds with your goal for financial health. I am not a conspiracy theorist. Money is something most desire. Businesses, charities, governments - they cannot survive without it. Others want what you have. Their collective brains spend much brainpower articulating, quite well usually, why you should give them yours.
It is psychologically freeing to know you can spend the cash you have with abandon and know you will be OK. There are plenty of completely unpredictable things that occur in life. If you can put your money concerns aside, dealing with those things becomes much easier. Once you build these habits, you wonder why anyone would do anything else.
Now this is most definitely talking my book, because I know it to be true. You are capable of doing this yourself. It ain’t rocket science, mathematically. There are many tools available to you. Here’s the challenge. You need to craft a set of repeating behaviors. Compounding takes time. Not months, not years. Decades. If you are unwilling to devote the time to set up and operate a repeating system, are unlikely to sustain the habits, would rather spend your time doing something else (like being amazing at your chosen profession), and/or dealing with money gives you anxiety, you should hire a real financial advisor. Not someone who focuses on investment management, an advisor. Someone who will keep you on track, who will run a repeatable system, who will support the process, who will positively reinforce the right behaviors. Yes, they need to be competent at investment management, if you ask them to do that - it is not unimportant. It is also not the most important thing your advisor does - consistent process execution, with behavioral reinforcement is.
Simple. Not Easy.
Sundry:
I started studying Ursula Le Guin’s version of Tao Te Ching. Something tells me my process will be far different (and never finished) from when I read it in my 30’s. How lucky she was to be introduced to and exposed to her father’s study of it when she was young.
Thinking our government moves slower and slower each year and that distrust in the elected and executive functions has never been worse? Perhaps. Read Mr. Lincoln’s Army. Then think about how you feel. I am about 30% through it.
Writing while listening to The Clash? A great way to spend a few hours.