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One challenging aspect of personal finance is balancing longer-term goals against the realities of today. Many advisors and finance writers prescribe an austere budget as the foundation for success.
That prescription is so common that it has become cliché. Do a quick finance search on-line for Starbucks or pizza or even daily lunch options and you will find dozens of stories explaining how that expense can be transformed into your retirement nest egg. The math is simple: Five dollars a day times 200 workdays per year times 20 years invested in a good growth fund at 8% equals $45,760.13 (!).
Wow, think what you could do with that!
(Except in 20 years, that same five-dollar cup of coffee will probably cost closer to $10. God knows about the price of other stuff.)
It is magic… but also harsh. These types of simplistic finance illustrations do more harm than good. Most people are not going to skip their daily Starbucks or weekly pizza or brown bag it every day for lunch. Behavioral evidence is abundant. At this moment in this culture, that is not the way to achieve financial success. It is a Don Quixote-like railing at cultural windmills.
People are not machines, and they surely aren’t personal finance machines. Some people are frugal, and they can achieve success, but frugality alone is no guarantee for a big retirement account. Sometimes, that same focus on pinching pennies keeps them from investing wisely… or hiring competent help.
Other people score remarkable success without being miserly. My clients range from teachers to doctors to retirees, and many of them drive nice cars and live in nice homes. As far as I know, they dine out occasionally and spurge on a few luxury items when the mood strikes. And I know that many of them enjoy an enviable investment portfolio despite their “normal” spending!
Personal finance needn’t be intolerable. In fact, one reason people fail is because they envision it as boring, and it quite likely has been drudgery most of their lives. A good chunk of personal failure can likely be traced back to some Ben Stein sound-a-like high school teacher droning on about budgets and coffee and pizza.
Here is a friendlier approach
Find a way to help clients do the things they like. Do they like cars? Well, cars are expensive, but a lot of people drive very cool cars. How do they afford them? What kinds of careers and decisions allow them to drive the car of their dreams? What will it take to put them in that same driver’s seat?
Do they like going to ball games? Season tickets are expensive, but the stadiums are full every single game. How is it that thousands of people have money enough to sit in those seats every time the whistle blows? What are they doing that allows them this luxury?
There are many financial ideas I find every bit as significant as budgeting. I call some of them “life things,” like managing your career or choosing a responsible spouse. Others are directly financial, but in a slightly different way: choosing a house with appreciation potential, or cars that hold resale value better. Wisely investing for the long term also falls into this category. Retaining professional help for taxes, investing, legal, or other services can pay huge dividends, too.
Why is it that so many successful people have advisors, while so many that struggle do not? A lot of factors go into financial success, so it’s maybe a mistake to draw conclusions without research, but this one screams for more study. Truly, not everyone sees the value in professional advisors, but it is hard to fathom starkly different opinions.
Speaking of different opinions, I was once startled when a good friend chided me for leaving a nice tip at a restaurant. He pointedly remarked, “You must be rolling in cash.” Nope. But here is the truth: If you make the right big decisions, the little ones do not matter so much.
A $20 tip won’t make or break financial success
If you make the right big decisions, the little ones do not matter so much. I have a good job. I live in a nice neighborhood in a house I bought for a reasonable price. I do a bit of consumer research before spending money. I send money to my company retirement plan with every paycheck, and I make sure my investments are reasonable and diversified. I rely on quality advisors to help me succeed.
Some of those things are mundane, I know. Here is also what I know, though. I can afford a latte if I want, and pizza, too. I can go to ball games and drive the current car of my dreams. I enjoy eating in nice restaurants and do so as often as time allows.
And I can afford to tip the hard-working wait staff. It is not because I am rolling in cash. It is a little thing, I know, but I can afford it because I do the right big things.
Help your clients see beyond the weekly budget. Help them enjoy the things they want and need.
Dan Danford, CFP® is a NAPFA member in Kansas City, Missouri. He learned early ideas about money from his late father Thad Danford who charged rent on the family lawn mower while Dan cut neighborhood lawns. Danford is a practicing investment advisor and author of Happy To Be Different: Personal and Money Success Through Better Investing.
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