Ben Franklin can be a good guide to us here. In his autobiography, he tells an interesting story about his practice of frugality. For many years he ate a simple bread-and-milk breakfast in a “two-penny earthen porringer, with a pewter spoon.” One day, his wife served him breakfast in a china bowl with a silver spoon and he was aghast. She had paid twenty-three shillings for the bowl and spoon without his knowledge. He had become so accustomed to his frugal lifestyle that he didn’t know how to respond to a few luxuries.
Maybe the most important part of living beneath your means has to do with change. Most of us don’t like change, like Franklin and his humble earthen bowl. When we learn to like a lifestyle that does not consume all of our resources, we put ourselves in a position to save money over time. But more than that, we also decrease the likelihood that we’ll over-spend once we have substantial resources. I truly believe that living beneath your means is essential to achieving complete financial independence.
Save And Invest
Saving and investing are crucial to achieving complete financial independence. I believe every household needs both a spending and savings plan. I’ve already discussed the importance of living beneath your means to control spending. I’d like to pair that with the concept of an annual savings goal. This is especially important for high income-earners. I believe you should set a goal to save a percentage of your annual household income every year. What should that amount be? That all depends on your financial plan. I generally recommend that my working clients should save at least 10% of their annual income.
But it isn’t just money you’ve earned that you should try to tap into. There are numerous sources of free money that you can access, depending on your situation. For example, many employers offer up to 3% matching on their 401k program. If you’re not tapping into this, you’re leaving free money on the table. There are also scholarships and other forms of assistance for people going to college—a major financial commitment for most families. For business owners, there are numerous grant programs that can provide assistance. For instance, during the COVID-19 pandemic, I helped a client secure PPP money that really supported them through a difficult patch.
Now let’s talk about investments. When I focus on this topic, I often find that people have one of two responses: they either get excited or they feel overwhelmed by all the Wall Street talk. I’m not convinced that either response is healthy. Investing really shouldn’t be exciting for most people. It should be rational, dispassionate and focused. But it’s also not something you should find intimidating.
Here are a few guiding principles that shape how I think of investing.
- Risk: nearly all investments involve some level of risk. But I believe intelligent risks are good for long-term investors. I don’t have enough room in this article to describe intelligent versus foolish risks. But if we ever get a chance to sit down together, I’ll gladly outline my thoughts on this topic.
- Time: above I said that time-in-market outperforms timing-the-market. I believe an intelligent investment plan assumes long-term gains over many years. Strait & Sound does not believe in get-rich-quick investing.
- Diversification: this has to do with mitigating risk. Ben Franklin said a three-legged stool is not quickly knocked over. The same is true of investing. I once had a prospect tell me that they felt good about their diversification strategy because they owned Google, Apple, Cisco and Oracle. You can imagine my response.
- Purpose: every investment plan needs a purpose and a set of long-term goals. Many of my clients are also concerned about the ethics of the companies they invest in, looking for alignment with their moral compass.
Before I close this section, I want to ask you a question. Who is the investor: you or your financial advisor? I believe that we are the investor for our clients, most of whom entrust us with their entire life savings. We serve as a fiduciary to clients, acting in their best interests. We take that obligation very seriously.
I prefer to think of clients as something akin to general managers of a major sports franchise. GMs need advisors to help them make great decisions and to execute the details of the decisions they make. They cannot do everything themselves. Our clients are often the same way. They need great advice and someone to help them execute on all of the decisions they make in many different areas. We do not expect our clients to be investment experts or to keep up with the markets. We do this for them and keep them informed.
Protect Your Wealth As You Grow It
To achieve complete financial independence, you’ll need to protect your wealth over time. I generally recommend four ways for doing this: insurance, estate plans, diversification and heir education.
Most of our clients need health, life, property & casualty and other forms of insurance. However, it’s easy to have too much, too little or the wrong types of insurance for your unique situation. This is why you need your financial advisor to serve as your quarterback to understand your needs and work with insurance specialists to get you the best coverages.
These are critical for protecting your wealth from taxes, unjust seizure and from situations that you want to avoid, like wealth going to a child’s former spouse who your family now holds in low regard. Trusts, wills and powers of attorney for health and finance help ensure that your wealth goes where you want it to go.
I’ve talked about investment diversification above. But you also need asset diversification. For instance, I helped a client who thought the best way to diversify his assets was by buying real estate. He owned several different properties, some of which were cash-flow negative. Most of his free cash went to support those properties. If the real estate market would have tanked, his losses would have been nearly irreversible, given his age.
This is an area that not many financial advisors talk about. However, in my experience, this can be the single biggest risk to complete financial independence. Most people would give their children anything they need and supply most of their wants. The classic example of this is the story of the prodigal son who demanded half of his father’s wealth—before his father passed away no less—and then spent it on riotous living.
To help my clients in this area, I recommend a few things. First, set the right example by being a good steward yourself. Your example matters more than anything you say. Second, start your children on a savings plan when they are young. As they see their bank account grow, they learn the value of discipline. Third, introduce them to your financial advisor when they come of age. This is one of the best gifts you can give your children.
Be Wise With Inherited Wealth
Not all of my clients will receive an inheritance. But for those who do, the inheritance money can be just what they need to achieve complete financial independence. I recommend three strategies to my clients to help them get the most from their inheritance.
First, make a plan for the money before you receive it. I recommend that my clients sit down with their financial advisor to review where they are on their journey to complete financial independence. Then ask yourself how the inheritance can be used to accelerate you toward that goal.
Second, practice a stewardship mindset with the inheritance. Depending on how much you inherit, the money could be used to accomplish all sorts of different things. But I think it’s important to remember that your forbears likely worked very hard to give you the gift. You show respect for their memory and values when you practice stewardship.
Third, use the money to live out your purpose. Some of my clients use inheritance money to send their children to private school, to buy a family vacation home, to travel around the world or even to start a business they’ve been dreaming of for several years. Inheritance can help you achieve your full potential and experience the richness that comes with worry-free living.
Who’s Guiding Your Journey?
These seven strategies are the gateway to complete financial independence for most people, even those who were not born rich.
- Develop a healthy perspective regarding money – Stewardship.
- Develop and follow a long-term financial plan.
- Earn the highest income possible for as long as possible.
- Live beneath your means.
- Save and invest.
- Protect your wealth as you grow it.
- Be wise with inherited wealth.
I recognize that most of these ideas are not rocket-science. They’re common sense. I’m wondering how they compare to the advice you’ve been given? Do these make sense to you? If so, it’s probably time for us to talk about who’s guiding you on your journey to complete financial independence.