Personal Finance

People who practice good health habits are more likely to enjoy physical independence than those who smoke, eat junk food and don’t get enough sleep or exercise.  Clients who implement The Five Fundamentals of Fiscal Fitness© achieve financial independence and move successfully through the financial stages of life. 

 The 1^st Fundamental is to save 10% of your income.

 Why?

 a)      Saving 10% is the simplest and easiest of all budgets.  If you are saving 10% of your income, by definition you are living within your means.

b)      The secret to Financial Independence is to Fund your Future First.  No matter how much or how little you earn, you should always save 10% of your income as “permanent” savings.  Most people pay their bills first and save what’s left.  Financially independent people pay themselves first and spend what’s left.  The only money you really keep for yourself is what you save.

 c)      Saving 10% of your income is evidence of your ability to defer gratification.  According to psychologists the ability to defer gratification is an indicator of emotional intelligence and perhaps the most powerful predictor of success for young toddlers.

d)      Nobel Laureate, Robert William Fogel, has calculated that if the average couple with one spouse working part time, saved 14.7% of their income from the day both spouses entered the work force, the couple could retire at age 55 with a retirement income that placed them among the top 20% of all US households (William Fogel, The Fourth Great Awakening, p. 196.).

e)      Saving 10% of your income to build wealth reduces your dependency on Social Security.  Social Security was meant to be a social safety net, not a universal retirement plan.  When Social Security started there were 40 workers contributing for every one beneficiary.  Today the ratio of workers to beneficiaries is 3/1 and soon it will be 2/1.  There is no doubt that social security benefits will have to be reduced for the program to remain solvent.

f)       Saving 10% of your income provides a cash flow cushion which allows you to take more risk in your portfolio.  During an emergency, you can reduce your savings rate instead of tapping your investments.

g)      Saving 10% of your income even after you retire provides some inflation protection during the withdrawal years.  In practice this means that when you retire, your taxes and living expenses should be about 90% of your total income.

h)      Saving 10% of your income even during retirement reduces the impact of portfolio losses during the withdrawal years.  The key to retirement is managing spending.  By never spending more than 90% of your gross income, you continue to fund your future first and greatly reduce the odds that you will outlive your money.

The primary focus of a Financial Plan is to help you build and manage your wealth more effectively.  Achieving that goal requires you to choose one of three core financial strategies:

1. Accumulation
2. Conservation
3. Distribution

If you select the Accumulation strategy, your #1 priority is to build your wealth.  Accumulation may be the most suitable strategy if you do not have much wealth to protect or you do not have sufficient wealth for your life expectancy.  While you never want to lose money, adopting an accumulation strategy means that growth trumps safety.  A higher return is often more important than lower risk.

If you select the Conservation strategy, your #1 priority is to preserve your wealth.  Conservation may be the most suitable strategy when you have significant wealth to lose.  You may be near retirement or you may possess sufficient wealth to match your life expectancy.  In either case, not losing wealth becomes more important than gaining more.  Why risk going backwards if you have already arrived at your destination?  While you always want your money to work hard, during the conservation stages, safety trumps return.  Lower risk is more important than a higher return.

If you select the Distribution strategy, your highest priorities are enjoying the use of your wealth and planning for its final disposition.  Establishing and updating a values-based estate plan becomes very important.

You can leverage the Cambridge Financial Life Cycle© to determine the most suitable strategy for your situation.