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All Wealth is Relative

A recent article on CNN Money cited that “a whopping 70% of those with at least $1 million in assets that are invested or available to invest, excluding home values, don’t consider themselves to be wealthy…it’s only when they hit the $5 million mark that millionaires begin to feel ‘wealthy.'”

I would submit that our feelings of wealth are far more associated with the life decisions we make and social circles we participate in, than the numbers we see on our net worth statements. Ted Roosevelt once said, “comparison is the thief of joy.” Feeling wealthy is a function of feeling that you have enough…of wanting what you have, rather than being consumed with what you want. (more…)

Approximately Right vs. Precisely Wrong

Photo Credit: ThinkStock

Photo Credit: ThinkStock

The second president of the United States, John Adams, made a prediction years ago in a letter to his wife:

“The second day of July, 1776, will be the most memorable epoch in the history of America. I am apt to believe that it will be celebrated by succeeding generations as the great anniversary festival…It ought to be solemnized with pomp and parade, with shows, games, sports, guns, bonfires and illuminations, from one end of this continent to the other, from this time forward forever more.”

Make no mistake about it, John Adams painted an incredibly accurate picture of what was to come! This coming month, a mere 237 years later, our nation will celebrate its great anniversary festival by hosting parties, parades and fireworks with our neighbors, family and friends.

But focusing too heavily on the details, however, one could also argue that John Adams was wrong. After all, we celebrate our nation’s independence on the fourth of July, not the second!

In hindsight, it seems ridiculous to claim that Adams was incorrect. In the moment, however, it is easy to get distracted by minutia that has little relevance to our financial well-being. We easily become critical of ourselves and envious of others, resulting in us completely missing the big picture. (more…)

The Margin of Safety in Financial Planning

“The intelligent investor must focus not just on getting the analysis right. You must also ensure against loss if your analysis turns out to be wrong – as even the best analyses will be at least some of the time. The probability of making at least one mistake at some point in your investing lifetime is virtually 100%, and those odds are entirely out of your control. However, you do have control over the consequences of being wrong.” – Jason Zweig, Wall Street Journal columnist and author, Your Money and Your Brain.

Over the last several years, we are experiencing record foreclosures on homes across the country. One could argue (and very convincingly, I might add) that lenders should have never allowed people to obtain the mortgages they did leading up to this mess. However, home buyers are every bit as responsible for choosing to acquire a nearly fully leveraged asset (and more importantly, a liability) that provided no “margin of safety” in their financial life.

The conclusion these folks arrived at – that they could afford these homes (and second homes, and third homes) – was undeniably based on a wide range of assumptions. To name a few, these assumptions included (a) home prices will always increase, (b) tax rates will remain the same, (c) they will not lose their job or have to take a pay cut, and (d) that they will not experience any unexpected or “surprise” expenses like medical costs, home or car repairs, (e) cash flow will always be sufficient to meet obligations, etc. With no margin of safety in place to buffer against even one of these assumptions being incorrect, many people were caught sitting far out on an extended tree limb and had no chance of hanging on against the storm that quickly formed on the horizon. (more…)

Remember to Celebrate Success

The Fourth of July weekend is one of my favorite weekends each year. In what has become a bit of a ritual in the state of Minnesota, families pile into cars, SUVs and minivans and head north to lake country to get away and relax. The days are long and the weather typically registers somewhere in the mid to upper 80s. I make a note to remind myself every year that weekends like this are the reason we choose to tolerate the winters here!

What I really love about the Fourth of July weekend, however, is the opportunity to celebrate. After all, that is precisely what this holiday is all about. Just 234 years ago, our forefathers accomplished something great by declaring the United States a free country. A day before the signing of the Declaration of Independence, John Adams wrote the following in a letter to his wife:

The second day of July, 1776, will be the most memorable epoch in the history of America. I am apt to believe that it will be celebrated by succeeding generations as the great anniversary festival. It ought to be commemorated as the day of deliverance, by solemn acts of devotion to God Almighty. It ought to be solemnized with pomp and parade, with shows, games, sports, guns, bells, bonfires, and illuminations, from one end of this continent to the other, from this time forward forever more. (more…)

Is Budgeting Worth It?

Budgeting. The word itself makes most people cringe. The process of budgeting can be very cumbersome and frustrating. First, you have to sort through statements and online transaction ledgers to identify all of the regular expenses you encounter on a regular basis (mortgage, car loan, utilities). Once you have them figured out, you begin the struggle to make sense of all the expenses that occur each month, but do not quite have a consistent, predictable pattern (groceries, entertainment, clothing). Still further, you realize there are even more that do not repeat themselves in any consistent pattern over time (auto repairs, home improvements, vacations, medical expenses), but will certainly come up at some point down the road.

Eventually, you refine and revise the numbers to arrive at a budget. Some folks even track their spending through software programs such as http://www.mint.com and Quicken. A few months later, however, you realize that your actual spending has deviated from the budget you set and struggle to figure out how it went wrong. As frustration sets in, you begin to believe that this whole budgeting thing just isn’t worth the time and effort.

The breakdown that occurs in this process is simply that budgets are an incomplete cash flow plan. Further, the tracking systems listed above provide an excellent backward-looking perspective on your finances, but do little to help you maintain control moving forward. Without a system in place to effectively manage your cash flow on an ongoing basis, a budget alone is worth about as much as the paper it is written on. A proper cash flow system will keep you in control of your money rather than allowing it to control you. (more…)

Peaks and Valleys

Inherently, money has no value at all. It is a dull, lifeless, man-made creation designed to ease the facilitation of commerce. It exists as pieces of paper, coins, or numbers on a spreadsheet or statement.

The real value of money lies in what it allows you to experience. In our society, money provides a mechanism to get the goods and services we need and want. As we continue to achieve higher success, we begin to mentally recategorize many of our wants as needs. We all know that money does not buy happiness, but that sure doesn’t stop a lot of folks from trying!

In his book, Peaks and Valleys, author Spencer Johnson describes the journey through our lives and professional careers as a series of peaks and valleys. The key to living a richer life is centered on the way you perceive and experience them. When we reach the summit, it is very easy to feel accomplished and pat ourselves on the back for the successes we have had. We often believe that a well-deserved celebration is in order after all of our hard work. However, as the celebration begins, many folks begin to look around at the new view and focus their attention on all the other people that have reached a higher summit. We are better off looking back down into the valley to remind ourselves of what got us there, and shift our focus toward remaining at the peak as long as we can. (more…)