This week’s blog post in our “Financial Planter” series is written by Chris Vasquez, a Financial Services Professional.*
During my existence in the financial planning world, I have met a lot of people. Some have no idea how far behind they are from reaching their retirement goals, while others (a much smaller percentage) are well prepared for many years of living on what they have accumulated for retirement. Here are three common themes I have learned from wealthy individuals throughout the years:
1. Live Within Your Means
The first theme is very fundamental and there is nothing magical about it. Live within your means. What that really means is, live below your means. Let me explain with a couple of stories to drive this point home.
Tim was in his fifties. His number one goal in 2011 was to save five percent of his income. Tim was earning around $300,000 per year. He presented to me a four-page excel spreadsheet of annual expenses and was having a difficult time saving five percent of his income, or $15,000 per year. He had an old 401(k) worth about $90,000 from a previous employer and said he was not able to contribute to his current 401(k) , even though his employer matched and – wait for it – he would like to retire in the next five years. Tim was in big trouble. After 30 years of working, his lifestyle had inflated beyond his resources.
The second story is quite different. Cynthia wanted to meet with a financial advisor to see if she was on track for retirement. Cynthia was also in her fifties. She did not earn as much as Tim, but she’d worked hard over the years and now enjoyed an income of about $120,000 annually. Here, was the game changer. Since her first job out of college Cynthia had always lived on about 70 percent of her income and saved the other 30 percent. I asked her what made her choose those specific percentages? She said, “Growing up, my grandpa raised me and always talked about living on less than what you earn.” She said, “Thirty percent just seemed like a good number when I got my first paycheck out of college.” Because she had lived below her means for all those years, she now had an overall portfolio value just shy of $3,000,000! Cynthia has the flexibility given her saving and spending habits to retire early.
The moral of this story is that living below your means could pay huge dividends like it did for Cynthia. Even though Tim makes more income than Cynthia the odds of him ever catching up to her savings are slim to none.
2. Use Debt Wisely
The second common theme is to use debt wisely. Maxed out credit cards, large car payments, taking loans on 401(k)s, and home equity lines of credit that are used to purchase depreciating assets are usually not wise choices when using debt. Tim had made some very common mistakes by over extending himself with various forms of debt. A big one I recognized from the four-page excel spreadsheet (mentioned above) was taking on too much credit card debt with high interest rates. This will be a vicious debt cycle that Tim will stay in until he changes his daily financial behaviors.
Cynthia, on the other hand, was so far ahead financially of Tim due to the fact she delayed consumption (did not swipe a credit card) in areas Tim felt were needs in his life. Debt is something that most people will encounter at some point in their adult life. The key is if you take on debt make sure it is reasonable and, ideally, used to purchase appreciating assets - like a home.
3. Begin With the End in Mind
The last common theme I learned from the wealthy was to spend some time thinking about your financial future. Most people go through life devoting more time to planning their next vacation or shopping for a new car, instead of thinking about their future. Spend time envisioning where you'll be, what you'll be doing and what financial responsibilities or goals you might have.
It makes sense, right? If you want to plan a trip to Europe next year you will need to figure out how much the plane tickets are, how much spending cash you should bring, and how much lodging will cost. I am always amazed when people tell me about their great trips and how much time, effort, research, and attention to detail they spent with planning a week-long trip.
On the flip side, what if you spent some time each year thinking about what life looks like after you stop clocking in? For some people this may be a 20 to 30 year retirement time frame to take into consideration. What does that look like for you? How much will you need to save? What are you going to be doing on a daily basis if every day is like a Saturday? Thoughtful, financially savvy people approach financial planning with the careful attention of planning a vacation.
These common themes, if followed, can pay off very nicely in the long run. The challenge is you will be swimming upstream when a lot of other people around you appear to be swimming downstream. Social expectations pressure you to take the extravagant vacations every year, purchase a new car every other year, pick up bar tabs on your maxed out credit card, etc. Just stay on the course, and if your friends question your decisions, remember this quote from novelist Anne Tyler: “People always call it luck when you’ve acted more sensibly than they have.”
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*All content provided in this blog is supplied by Chris Vasquez is for informational purposes only. Barclaycard makes no representations as to the accuracy or completeness of any information or found by following any link within this blog.
Chris Vasquez, is a Financial Services Professional with Lucien, Stirling & Gray Advisory Group, Inc. in Austin, Texas and is passionate about helping people achieve the life they want. Chris emphasizes that daily behavior with your finances is more important than knowing every detail about financial planning.