My wife and I love watching British crime series (and yes, I need subtitles).
One of the features of these shows is the crime-wall board. This board features pictures of the victims and suspects with strings attached showing various connections leading to solving the crime. Sometimes, the links lead to nothing or steer us in the wrong direction.
This is the same with our financial planning.
Your planning wall has various choices, some leading to living the life you want to live and others making you veer off course. Here are some of the clues to each.
Money anxiety typically comes from worries about not getting what you want or losing what you have. The strongest string tied to anxiety is debt.
Some debt is arguably good. Borrowing for a long-term home purchase makes sense because you are owning an asset you intend to keep and will hopefully appreciate. Because of inflation, you pay those mortgage costs with cheaper future dollars.
Borrowing against an investment account can make sense if you are old enough so an avoidance of capital gains at death is worth more than the carrying costs on your debt or if you will soon benefit from tax savings on a move to a lower income tax state. Many auto companies are offering 0% interest loans, and, if you do your research on what you should be paying for the car, this is a sound use of debt. Even student loans, an investment in your future, are purposeful if the job you are likely to take will improve your future earnings.
But the availability of other debt, coupled with its ease of use, leads to awful outcomes. Debt decreases your options. We have had young doctors come into our office who chose subspecialties based on their future earning potential because of their need to cover their student debt rather than practice in an area of interest. And don’t use debt as a way to justify an experience. If you can’t pay for it, delay it until you can.
Regardless of how much money you have, a string connecting to good outcomes is developing a bucket approach to spending. Make a determination of how much money you wish to dedicate to certain areas. When my wife and I were starting out, our three buckets were saving, spending and sharing. We tried to be conscious of how much we were putting in each, never ignoring any of them. Clients who are retired need to understand how much of their savings they direct to their costs. If you are spending 4% or 5% of your investments each year, then a $5,000 annual trip requires $100,000 of investments to support it. As you age, you can spend a higher percentage of your portfolio because your money won’t need to last as long.
Another string that leads to good financial outcomes is focusing on the why of your choices rather than the what. For example, sometimes clients fall in love with a home and ignore other aspects that will affect their enjoyment of it: community, commute, upkeep. With client real estate decisions, we always focus on where they want to live before what they want to buy.
Strings leading to bad outcomes are usually external rather than internal money choices. Remember, wealth is what you don’t see. Clients come into our offices and wonder how their neighbor can do this, and they can’t. They have no idea whether their neighbor is in debt or had family money. They only see what that person spends. And since we live in a world of comparison, watching usually leads to suffering.
Our standards of living would be unimaginable to people even 50 years ago, so why focus on what we don’t have instead of what we do? Wealth concentration is far more pronounced than it used to be, so it might make it difficult to appreciate what we have. Elon Musk and I have a combined net worth of more than $800 billion; it just isn’t equally divided.
The best string leading to a good outcome is simply accepting everything is constantly changing. We have much we can’t control, so keep your financial planning wall strings loose so you can adapt.
Related: Building Wealth That Holds up When Life Starts Slipping Like Quicksand