You have to know where you really want to go financially, or else you’ll never get there
- Smart investors and their advisors look at both the art and science of financial planning.
- The art side of it is about understanding how you feel, where do you want to go financially and what your future plans are.
- Knowing your balance sheet, you cash flow and your tax situation, are keys to financial success, especially from the scientific perspective.
Many people ask me, “What’s the definition of rich?” I’ve heard everything from having a half million dollars, which sounds pretty low to having over $10 million dollars, which sounds kind of high. It’s a really wide range and there’s no precise definition of what it is to be rich.
Maybe this story will help. At the end of 2006, a couple came to see me and they really wanted to retire. The husband was tired of working, but they were depressed because the last time they had really looked at their money was back in 2002. The market was way down and their assets were way down. It didn’t seem like they would ever get out of the hole they were in and the husband felt he had another five or ten years of working ahead of him
Get Rich vs. Stay Rich
So I did a projection for them and looked at where they really were financially. They just couldn’t believe it when I told them they could retire right now. I asked them if they knew which game they were playing–the Get Rich game or the Stay Rich game? When they asked about the Get Rich game I explained that it described their holdings right now–about 90 percent of their assets were in equities (stocks, private investments and other kinds of real estate) and very little in bonds and cash. That’s not a Stay Rich portfolio; that’s a Get Rich portfolio.
So what’s a Stay Rich portfolio? Well, it has a lot more liquidity and a lot less in equities. It’s set up to protect you in bad market cycles. When the couple looked at their circumstance, they realized they weren’t trying to get rich; they were trying to stay rich, which totally changed the financial direction they were going.
Blending the art and science of investing
So this is kind of an art and a science. The art part is having a certain feeling about where you’re going financially and in life. If you’re just piling up money to get to some point in the future, that’s not a plan.
The science part of it is about three things:
- It’s about your balance sheet–what you have in assets.
- It’s about your cash flow–what’s coming in, what’s going out
- It’s about taxes– what does it cost you to pay taxes to the government.
Those are the three things that are the science of whether or not you can do what you want to do, assuming you continue along the same path you’re currently on.
Think about this. The markets have gone up 158 percent since the low in March 2009. That’s huge. So, if somebody had a million dollars in their 401k account back then, and it was 100 percent invested equity, then it would be worth over $2.5 million today. That’s a big difference. So obviously taking a look at where you currently are and seeing where things are, is very important. That’s the science side of it.
If you’re at home right now, sit down and look at your finances. If that’s too difficult, or you just don’t want to do it, then consult your trusted advisor and ask him or her to help you through the process.
If you don’t have a trusted advisor, certainly contact us. We have a second opinion service. We can certainly walk you through both the art and science of financial planning and help you decide if you are in the get-rich game or the stay-rich game. Once you do, you can figure out how you’re going to proceed successfully into the future and sleep better at night.
So until next time, enjoy. Gary
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