When it comes to the blogs and other tracts providing information on building wealth, frugality carries most of the weight. And it makes sense. The greater the difference of income over spending is a strong determinant of the level of wealth an individual will achieve during their lifetime as compared to their income level.
As important as frugality is, spending is even more important, even if it doesn’t garner the required column inches the matter deserves. Spending less than you earn is the seed money for investments and without investments it is impossible to build significant wealth.
As an accountant I see people from all spectrums of income. Frugality, even hyper-frugality, is the hallmark of those with modest levels of wealth. Even the lowest income earners can amass a half million or more in a working career when frugality is taken to religious levels, with the excess invested in equities like index funds.
Mid-levels of income also do well with only the single tool of frugality. As their wealth grows they sometimes seek out professionals to help them. These clients tend to want short consulting sessions once a year with a review at tax time.
Then come the serious achievers. These people sometimes have modest incomes, sometimes large incomes. Regardless their income level, these people smack it out of the park. Their level of wealth is well beyond what would be expected for their income level or level of frugality (the excess of income above spending).
Super-achievers in wealth building focus on spending more than frugality. They know spending is more important. And they know most spending drains their energy and wealth while proper spending can actually make them richer!Read More
Five months ago COVID-19 was just getting started. Fear was rampant. People and businesses made rushed decisions with long-term consequences. In the U.S. fewer than 10,000 people had died from the virus, yet fear was many more would die.
Over concerns clients and readers (that is you my kind friends) would make poor financial decisions, I published an article encouraging caution and recommended people relax, breathe deeply and think before making a decision. By thinking before acting, I felt my people would be in a better position to make decisions that would serve them well.
Then I watched my readers act and react on social media. The spread of COVID-19 should have run a chill down the spines of any normal human being. But social media does not bring out the “normal” in people. Some over-reacted with the attitude everyone should shelter in place forever. But as always happens, the disease became “normal” as we saw it every day. Before long people wanted to get out and act as if nothing was wrong or that the risk had ended. The middle, sensible, ground somehow lost out.
It is sad the intelligent solutions lost out. Again, social media was rife with conspiracy theories, questionable remedies and outright lies. Social distancing, washing hands and masks are three simple things everyone can do to slow the spread of the virus until a vaccine can end its rein of terror.
Logic didn’t work 5 months ago, so now I have to get blunt. This is a financial blog so there is a reason for the focus on a medical issue. Your reaction to COVID-19 is a large part of the way you think. If you conduct stupid, risky behavior with your life, you probably do even worse when it comes to money. The best way for me to convey this message is with the good cop/bad cop routine.
There are two parts to this post. Part 1 is a mild comedy sketch of the facts. In Part 2 we will put it together and pull out meaningful and valuable data you can use. This value will increase your wealth and allow you to live long enough to enjoy it. Remember, Part 1 is dark comedy and not my opinion. I don’t want hate mail before you read the whole story.
The faulty logic used in our dark humor skit is more than a risk to our physical health; it is the same mindset that harms you financially. We actually have people who believe 1,000 or more dead Americans a day isn’t that bad. There are people who think it is okay to carry on as if nothing has changed because only old people suffer the consequences. They forgot their Hemingway: Do not ask for whom the bell tolls; it tolls for thee. (For exact quote use the link.) The clock keeps counting for all of us and since I see no old people saying, “I don’t care if young people do stuff that might kill me,” I assume today’s young people will want respectfully behavior from the future’s youth.Read More
The willingness of leaders in Washington to spend whatever is necessary, coupled with the Federal Reserve’s willingness to use unlimited resources to counter the economic dislocation, make it impossible for economic activity to descend into the chaos of the 1930s. Stimulus checks to individuals and forgivable loans to small businesses will limit the damage. Make no mistake, the damage will be acute and will linger. That lesson was taught us by The Great Depression. WWII spending proved the path necessary financially to beat the economic demon into submission.
More proposals keep coming forward. Nearly $3 trillion in stimulus spending is already passed and working its way into the hands of individuals and businesses. It is not enough and will run short. Congress knows it and keeps pumping more stimulus measures at every whiff of a slowing economy. How much more stimulus spending will come is anyone’s guess. All I know is nobody seems to want to rein in the excesses at this time. And that is probably a good thing. The 26% of GDP deficit in 1943 is only the worst year of many with large fiscal deficits in the early 1940s. The spending was insane back then and America thrived afterwards. With the money going into the hands of Americans (back then and now) there is no doubt in this accountant’s mind the economy will pass this painful speed bump reasonably quickly with far fewer casualties than if belated measures similar to 2008-9 were used; or worse, the reluctant policies of 1929-1932.Read More
Maybe today isn’t the ideal time to take the early retirement you planned. But the day is fast approaching. The pandemic will pass, economic activity will increase and the market will travel to new highs. Beginning retirement when the economy is at the beginning stages of a bull market allows for the longest period of growth before your budget is seriously challenged with declining asset prices.Read More
Restarting the economy is going to be more difficult than it was stopping it. A vigorous discussion on the topic is desperately needed as many feel talking about opening the economy is akin to reigniting the infection rate when in reality the discussion is needed to formulate an appropriate and workable plan.
Talking about restarting the economy is good policy. Shutting down large swaths of economic activity was necessary for public health. And for the most part it was a fairly easy process: governors gave the order and their state ground to a halt as people sheltered in place, giving COVID-19 no viable path to propagate. The same happened around the world. It is The Day the World Stopped.
The spread of COVID-19 had slowed and in many countries has all but stopped. Concerns the virus is picking up steam where social distancing is relaxed is still a real risk. However, policies designed to slow the spread of the virus appear to be working. Multiple medical therapies hold promise and a massive effort to develop a vaccine are in progress. A vaccine would be a game changer, but realistically that is still as much as 1 ½ years away before it becomes available. The economic price would be too high, and the resulting harm to human health from lack of services, too damaging to wait over a year before reopening the closed parts of the economy.Read More
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is the attempt by Congress to reduce the economic dislocation caused by the current pandemic. Taxes play a key role in the Act, along with several economic stimulus policies.
Normally a new tax law requires time to figure out all the details. The Tax Cuts and Jobs Act (TCJA) of 2017 is still looking for clarifications on several issues, some of which are addressed in the CARES Act. COVID-19 had pushed economic decline into overdrive. The American economy has never declined at such a pace. Businesses and individuals went from good economic conditions to millions unemployed and many businesses forced to close. A draconian stimulus package was required.
The CARES Act is $2.2 trillion of federal stimulus. With no time to iron out the details, rumors are flying. Normally reputable sources of information are struggling to get facts out. Misinformation is rampant. This post, along with the accompanying Facebook Live event, will outline the facts as they currently stand. The facts might change is some situations. I will correct those errors in this post periodically so you have a reliable resource. There are many instances where the only answer is: I don’t know. Because nobody does, even the people in charge of the programs.Read More
Rules of thumb are an easy way to quickly see where you stand financially. Once you reach 25X your spending in liquid net worth (the 4% rule presented as a multiple of spending) you are assumed to have enough to retire under the 4% rule, regardless your age.
However, as we are seeing with the current market turmoil, the simple rule of thumb has one fatal flaw. If you reached your 25X goal a few months ago and decided this was the time to step away from traditional labor, you now face a withdrawal rate from your index funds a third higher than expected. This will reduce the account value early in the distribution phase, lowering the total amount you can get from the investment over your lifetime.
Another rule of thumb is to keep 6 months of spending in cash in case you become unemployed. Under a normal job loss or economic decline this would be a reasonable policy to follow. Unemployment insurance can provide additional cushion to the 6-month cash reserve.
Black Swan events (unexpected negative economic events such as the housing crisis or pandemic) throw the whole rule of thumb out the window. Black Swan events do not happen often, but they do occur every decade or so. Looking back at U.S. history, it seems something always happens every decade to knock the markets lower and slow economic activity. The 2010s are the only decade to avoid that fate and 2020 seems to be making up for the oversight.Read More
The stock market is down, reflecting the dim prospects for companies trying to turn a profit in a quickly declining economy. Decisions need to be made while you are under heavy duress. Should you sell an investment, or maybe buy? Is early retirement or collecting Social Security early a good move? How does your business survive if it has been deemed non-essential? The financial decisions you make today will have consequences for years to come.Read More