By Brad Thomason, CPA
I’m about to make one of those broad, sweeping declarations which is so often misguided, mistaken, and just wrong. You folks get to decide if you think I’m right or wrong on this one. But I’m pretty sure I’m right.
Here goes: Most of the people who are interested enough in financial planning to actually engage in it, are people who already have some amount of wealth.
The hope of financial education and planning is that it can serve as a pathway to wealth creation for just about anyone who decides to put in the time and the effort.
The reality of it though is that it is primarily the domain of those who already have some money.
To further refine my statement, I would say that if you took all of the people who spend time engaged in purposeful financial activities, the majority would be those who already have some wealth, and the minority would be engaged for aspirational reasons.
Moreover, if you took the population of those who did not have money, the majority would be doing nothing, and again, only the minority would be those who engage for aspirational reasons.
So if that premise is true, and we start thinking about what that could imply, I think one of the plausible conclusions is this: part of the motivation for actual engagement is tied to the fear of losing what’s already been gained. Those with more to lose are less interested in losing, and as such, are willing to spend more time and attention on financial matters than those who don’t (from the perspective of owning a pool of assets) have anything to lose. Conversely, if the prospect of merely having more were sufficient motivation for the typical person, we would see the aspirational pathway clogged with a whole lot more travelers than is actually the case.
I think that matters, because people often react negatively to the idea that decisions are being made out of fear. I myself have even made such arguments on occasion. But whether we find it palatable or not, is a different matter than if we should allow ourselves to be so motivated. We may not find fear to be an attractive motivator, but that doesn’t mean it’s not a legitimate one.
To dig into that a bit further, now is probably a good place to point out that this discussion is one of those instances of a word in common use having a different connotation than it does in technical use. That word here, is fear. The term fear is often used as a stand-in for what psychologists and sociologists would actually refer to as loss. Loss, as a technical term, means either that you were hoping for something valuable and didn’t get it, or you had something valuable in the past and don’t anymore.
That’s really what we are talking about when the term fear is used in a financial discussion.
Or to restate the original premise with cleaned-up terminology, we as financial decision makers are often motivated by wanting to avoid loss.
Which seems like a pretty rational desire; and as such, a pretty legitimate motivator, doesn’t it?
There is good reason to not be ruled by the things we fear (or want to avoid, if you prefer that phrasing). Yet those sentiments come from somewhere, and it is not automatically certain that such sentiments are the simple products of irrationality or ‘being emotional.’ I can make a very good, totally objective argument for the notion that losing assets you spent decades accumulating is a bad thing. Bet you can too. The trick then, is to do the work of introspection necessary to determine if that fear that’s pushing you to do or not do something is just a case of bad nerves, or the result of being aware of potential loss which will do real and substantive damage should it come about.
So my suggestion is this: don’t worry about trying to shake off the feeling that fear is an unattractive motivator. If someone tells you fear is a bad motivator, just say ‘ok.’ You don’t have to move to the viewpoint that you like it. Just don’t let the fact that you don’t like it cause you to ignore your inner voice when it is telling you that there’s something that needs attention. If you assume out of hand that such feelings are simple paranoia, you may find yourself on the receiving end of a loss which you knew was shaping up, and which you knew how to avoid before the fact.
By Brad Thomason, CPA
When you think about the much-mentioned “1%,” you probably don’t immediately jump to the image of a slow-talking farmer from a little rural town in the South.
But he was most certainly a 1%-er. In addition to cattle and some row crops, he grew high quality sod on river-bottom land that had been in the family for several generations. This was back during the housing and golf course booms of the early oughts, and his sod was rolling out on trucks just as fast as they could grow it.
We were discussing his long-term plans, and a standard part of that discussion is based on questions about what a person wants to do in the future and how they plan to spend – and enjoy – their money.
I remember he smiled at me and said something to the effect that there were only two things he really needed to have an enjoyable life. The first was clean clothes to put on every morning – and he made a point of reiterating that they merely needed to be clean, not new. The second? Sharp razor blades.
After that, everything was extra.
He went on to say that he already had both of those, and as such he was already in the midst of what seemed to him like a pretty luxurious life.
Now to be sure, part of this exchange was theatrics, and he had a wry look on his face while answering the question. Nonetheless, he was also completely serious. Those were the things he really wanted, and with them attained, his zeal for any particular extra thing was not that high.
When we think about the future and the idea of luxury, as such, it is common to imagine many places and toys and experiences which all have the commonality that they cost a lot of money. That’s fine to a point, but when it comes to actually setting budget numbers for retirement income, it’s always better to have projections come as close to reality as possible.
I had a very different discussion with another person, who claimed a love for travel. The result? A line item in the permanent budget of $50,000 every year for trips. I told this person a story of some family friends, an older couple who also liked to go on several trips a year, but who, as they had gotten older, had come to look forward to supper on the first night back home as much as the trip itself. After a week or more eating restaurant food, they were ready for something different, and they always had the same thing on the day they got home: dry beans, cornbread, and a bit of country ham.
I concluded by saying that the odds of actually traveling enough every year for the rest of his life to spend that kind of money was highly unlikely. Many people who think they love to travel, pre-retirement, come to find out after three or four marquee trips, that they have a growing sense that they have checked that box on the list. They view the production of it all – even if they remain ok with the cost (which many don’t, by the way) – as more than they want to tackle. Turns out being away from home takes more of a toll than folks tend to factor in when the excitement of a coming big trip is all that they’ve got room to think about. You have an intrepid bunch who follows through on the plan to keep on moving all throughout their retirement years. But they are the minority. Most get the trip to Italy, or Alaska, or wherever out of the way, and slide one step closer to being decided home-bodies.
Well, so what? Is financial calamity going to ensue because you budget a bunch of money for something and then never spend it? Probably not.
But as I said, at a theoretical level, closer match between what gets put into the plan and what is most likely to actually happen, is better practice. And at the level of practice, do be aware that setting a particularly high bar for future income needs can affect you substantially, as a stressor, in the years leading up to retirement. Funding an actual $50,000 annual line item can require well over a million dollars in capital. So to set yourself the task of saving an extra million dollars on top of what you already need is a pretty steep hike. So much so that you could work yourself, and worry yourself, into a state of health that you wouldn’t be able to enjoy the money even if you did managed to set it aside.
So balance, moderation, and realistic expectations about what the future is likely to look like. These are what we want to favor. Obviously we can’t predict everything. Yet there are still some possibilities which we can all look at in sober fashion and make a pretty close guess. If you didn’t spend your working years staying in thousand-dollar-a-night hotel rooms, driving European performance cars, or living out of a suitcase four months a year, you are unlikely to start doing so on a repetitive basis for the duration of your retirement years. You might do some of it to see what it’s like. But that’s an altogether different thing. One-time expenses, even rather large ones, affect financial models very differently than ongoing expenses.
In the end, it is a lot more sensible to look for the luxuries you will actually engage in. When you do, don’t be surprised if what rates as luxury to you makes you chuckle a little. Maybe not in embarrassment, per se. Just recognition that it might not be all that exciting to anyone else, even if it means the world to you.
A lot to be said for clean clothes and sharp razor blades. Freely admit, I’m a big fan of both, myself.
Do you have your own library? We do. It’s been particularly on my mind today because I have been having to re-shelve all of it.
A couple of months ago we were moved out of our long-time offices for temporary space nearby, due to a problem that the building had with water getting inside the roof structure and running down the back of the exterior walls, between the bricks and sheetrock. The restoration contractors wrapped up last week, so we’re in the process of moving back.
Since the pandemic alone wasn’t sufficiently disruptive…
Anyway, as you have probably noticed, education is a big part of our philosophy on how to do financial planning and retirement preparation. So it likely comes as no surprise that we would be cheerleaders for reading. In the spirit of making the case for more time reading (something Warren Buffett claims to do for several hours every day, by the way), here are a few thoughts that popped into my head as I was unpacking our many-hundred volumes this morning.
WHAT A BOOK IS
I like to think of a book as a distillation of the author’s thoughts. You can’t make it all the way to writing a book without meaning to, and part of that process entails contemplative time spent on what to say and how to say it. Being in the presence of thought has a consistent way of inspiring or prompting more thought. And who among us couldn’t benefit from a little more time spent thinking?
AGREEING WITH THE AUTHOR
It is not necessary that you agree with the author’s position in order to get the benefit of exposure to the author’s thinking. I would say that a lot of my most productive thinking over the years has come when I flatly disagreed with the point an author was asserting. Being comfortable with this occurrence has an interesting practical effect: you stop worrying about whether or not the book is going to be any good. As a result, I’m whatever the term is for the opposite of a book snob. We have titles in our library that would likely prompt you to roll your eyes or cast surprised glances back in my direction. We have some that are downright goofy, replete with “wisdom” and advice that no sane person would give any credence to. But they serve a purpose. There is nothing like an articulation of the absurd or off-base to inspire one to compose a lucid summation of the actual right way to look at something. Knowing what you believe and being able to articulate it are two different things, and the humorous levels of fury which a wacky author can induce is one of the best motivations I know of for putting your own thoughts in communicable form. Also pretty good at shining light on holes in your own logic that you never realized were there. An angry reviewer is a thorough reviewer.
SUBJECT DOESN’T MATTER
The other feature about our library which you would pick up on almost right away is the breadth of topic coverage. Of course we have all of the sections you would expect, dealing with investment, business management, and so on. But you’d also find history books, literature, guides on constructing wooden boats, religion, travel, psychology and a dozen other topics. Most of the world’s big ideas do not limit themselves to the topics which we humans invent to make it easier for our minds to organize information. The Law of Diminishing Return which is discussed in the economics book is just an example of the limit functions described in the mathematics book, and the reason that the physics book says you can’t fly faster than the speed of light (when you get going really fast, mass starts increasing so rapidly that you can’t find enough energy to keep the acceleration going). The characters that Plato met on the road, or the ones Moses found at the base of the mountain, are the same ones you will be interviewing for the new position at your office. And so on. The wider your reading becomes, the more you will become aware of just how few really core ideas are out there, and how they have a way of being a player in so many different things we think about and act upon.
So that’s my PSA for reading for this week. If you are not already a frequent reader, why not take a virtual stroll through the used book section of Amazon or Ebay? Take a few shots at random. Won’t cost you a lot of money, and you don’t even have to read them cover to cover. Just open one up and see how far you get before you find the bottom of your coffee cup. Try another one the next day. Never know what you might stumble across, and there’s no way to predict the resulting mental ricochets it may set off inside your noggin. A lot of value available, for not a lot of money. In other words, a pretty good investment.
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