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Financial Responsibility in an Irresponsible Environment – An Analytic Review

April 10, 2014
In the course of my career as a financial planner in Southern California I have encountered many instances of clients living beyond their financial means. Despite the court of public opinion, living "at your income level" is never sound from a financial perspective. While many of us were raised in an era of poor financial planning and an ever-increasing proclivity towards utilizing leveraging instruments (mortgages, lines of credit, etc.) it can be observed through a simple observation of history in the US that our society has never been one to prioritize long-term financial planning. As I have written in excess of 500 comprehensive financial plans to date in my career, I can attest that less than 5% of the clients (or 1 in 20) I have worked with have, prior to our working together, saved even close to 10% of the assets they need to endure even a relatively short-term financial crisis like disability, extended periods of unemployment, or the more common upside down mortgage environment. While likely none of this is shocking or epiphanous to anyone, what can be a surprise is how common it is among mid and top income earners.

These income earners are comprised of a range of incomes from $250,000/year to $2MM+/year. Based on professional observation, I can say that regardless of where the client fell on this scale, most were proportionally saving 8 - 8.5% per year of their NET income on a consistent basis. While this is not a particularly poor rate, what I also observed was what can only be titled as "extraordinary" discretionary spending that, when averaged over the course time, reduced that margin of savings to less than 2%. Doing the math forward from that perspective shows us that if most people will need to spend about 75-80% of their current annual level income each year in retirement and actuarial data suggests most people under the age of 45 today will be retired longer than they were an active "worker" you simply won't make it. Even with compounding interest at a modest 7% and investing every dollar saved, your chances of "full" retirement are exceptionally slim.

So you might ask what is the point of this review?

The very simple answer is: to create a realization that if the biggest expense you encounter every month or year you are working isn't your combined savings, you're not going to have the retirement you want unless you have a passion for compromise. This doesn't mean you have to live as a minimalist (unless that is your choice, but that would mean you're likely saving plenty) but it should make you aware that your chosen lifestyle won't be sustainable through retirement or prolonged crisis.

The solution?

Also quite simple: Analyze your spending habits

Better yet, spend a little time with a spread sheet (it's the first thing a planner will do but on a more complex level) and categorize your expenses from your monthly bank statements in to Six basic categories: Savings, Taxes, Rent/Mortgage, Utilities, Groceries, Other. Hint: Cable/Satellite, Phone, and Gas (for your vehicle) are NOT utilities. When you're finished, if the largest category is Other, your discretionary spending is hurting your ability to reach your goals. If all that sounded like too much work or you get overwhelmed doing it, find a planner or advisor...soon.

The point of this article is not to strike fear in anyone, chances are good that if this article applies to you, that you now have at least one idea of how good or bad you are doing from a financial stability perspective if you didn't already know. What it should inspire you to do is ask questions or ask for help, either one is a great step toward securing your financial future for yourself and your loved ones.

The information provided is not written or intended as specific tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalties. MFG, its employees and representatives, are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.

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