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The DNA of Financial Planning Thumbnail

The DNA of Financial Planning

Insights

The essence of financial planning at its most basic level is captured in three fundamental thoughts:

  1. Live below your means
  2. Save as much as possible
  3. Don’t be irrational (If there is a question about what is irrational, consult a Certified Financial PlannerÔ

 The book The Millionaire Next Door was publish in the early decade of the 1990’s. The book was the conclusions drawn from a great deal of research conducted and collected by the authors who were two Georgia State University professors, Stanley and Danko. Adjusted for inflation, these millionaires that were a part of the study would today be worth $2.5M and more. The research and the book found that self-made millionaires, have many lifestyle characteristics and attitudes in common. A few that jump out to the reader are:

  1. Millionaires typically live in a house that is in a middle-class neighborhood and was purchased at a price point that is lower than the average house price in the neighborhood.
  2. They buy and drive used cars that have a track record of low maintenance and high dependability. Like a Lexus.
  3. Millionaires are generally not concerned with social status.

 In other words, millionaires live below their means and save a lot of money.

 Living below your means allows for income earned to be left over after the monthly bills have been paid. Save as much of this money as possible. The first amounts of savings should go into an emergency fund, 9 months to a year of living expenses. This money should be in a liquid investment, meaning you can get to the money quickly without any risk of loss. A short-term US Treasury or a bank short-term certificate of deposit are good for an emergency fund. After funding the emergency fund, you can then save and invest money in taxable brokerage accounts, a Roth IRA or in qualified retirement accounts like a traditional IRA or a 401K. Contact your financial planner to determine your appropriate investment portfolio and fund/security percentages.

Being rational requires critical thinking skills and research. Picking investment types, taking on debt, making educational choices, making decisions about eating, drinking and living requires a sound mind and methodology to be rational.  As it relates to investments, if it sounds too good to be true, it probably is. Focus on what Warren Buffett and Charlie Munger call slow money, as opposed to fast money. The eighth wonder of the world is compound interest, it takes time for it to do its work!

Implement the three simple, fundamental ideas and you will never be without resources to create a great quality of life!