Financing Your Future – Excerpt From The Financial Shepherd

There’s a great quote by Mahatma Gandhi that says, “Be the change you want to see in the world.” We submit to you that real change only comes when you allow God to change you too. And the only way to truly accept change in yourself is to know exactly what you’re dealing with by taking a good, long look in the mirror. The majority of people we’ve counseled over the years are living a double life. We’re not talking about a secret agent, hidden agenda, and clandestine type of life. We’re talking about something less sinister, but equally as damaging because they are living lives they cannot afford built on lies they cannot sustain. Most people live the life they want other people to see, and then build a reputation on it. Then there’s the life representative of who they really are. In most instances, those lives are vastly different, and the common denominator is money.

Something we have learned about money over the years is that it tells the truth about who a person is. If you follow the money trail, you can learn almost anything and everything about someone that you need to know to better understand who they are, where they’re going, what they want out of life, and what their plan is to accomplish it. 

On the outside, many people live like their finances are under control and they have all the money they need to fund the extravagant and luxurious lifestyles they lead. However, on the inside, many of the people who have come to us for help are financially barren – practically destitute – and can barely afford the designer clothes on their backs, much less the luxury automobiles and huge houses they live in. 

How you spend your money is often a good gauge of where you are in your life. Something we say in our business is, “Follow the money.” When you identify where someone spends most of their time and money, you can learn a lot about them and find out what their priorities are. For some, it’s a matter of basic necessities like keeping the lights on and putting food on the table. For others, it’s a matter of appearances such as frequent trips to the hair and nail salons and sporting the latest designer bag and shoes – regardless of the fact that most of these expenditures are paid on credit and almost never paid off in full. For most, it’s keeping up appearances – and living up to the professional degrees, titles, and positions that have been acquired. It is often about joining the right country club, paying for private school, living in certain neighborhoods, dining at certain restaurants, and basically bankrolling the present while bankrupting the future.

As with any type of failure, it is very difficult to point the finger at one particular cause. When I meet with couples after years of frustration in their marriage, there is never just one thing that caused the marriage to spiral downward – and ultimately out of control. After a long season of college basketball, there is never just one thing that caused the team not to win a national championship. Most likely, there was a series of errors; missed shots, poor passes, turnovers, and missed opportunities adding up to a loss. 

Likewise, if you are on the brink of financial failure, there is not just one thing that you can identify to be the root cause of your circumstances. There are probably several things including poor financial habits and training, inadequate financial knowledge, reckless spending habits, bad debts, mismanagement of credit, etc. Although there are many things that lead to financial failure, there is some commonality in each scenario. If there was ever a simple answer to the cause of failure in general, it would have to be poor financial planning and lack of preparation. Perhaps the best skill set to hone is that of preparation and planning because it can affect the outcome of every aspect of our lives. Preparation and planning do not require any type of educational degree, but they do require effort. They are not necessarily spiritual gifts, yet they do require wisdom. Careful execution can create the subtle difference between being rich and being wealthy. Christ also placed emphasis on the importance of planning. In Luke 14:28- 30 (NIV), His example transcends the barriers of time. The passage reads, “Suppose one of you wants to build a tower. Will he not first sit down and estimate the cost to see if he has enough money to complete it? For if he lays the foundation and is not able to finish it, everyone who sees it will ridicule him, saying, ‘This fellow began to build and was not able to finish…’” 

Isn’t this what happens when we fail to plan? When viewed from God’s perspective, the lack of planning seems to be quite careless, let alone costly. Later on, we will talk about the importance of setting goals as this is the all-important start to preparation and planning.

Without question, everyone needs somewhere to stay, but does each child really need his or her own private suite or wing in the home? It’s amazing to me to hear people that grew up years ago with four brothers and sisters in a 1,400-square-foot home now tell me they need a 10,000-square-foot mansion because they have two children and one on the way. As opposed to viewing a home as a dwelling place, many families bought into the idea that they would invest in their homes and use them for financial leverage. Unfortunately for millions of people, they didn’t do all the necessary research and legwork to make sure they could legitimately afford the house they purchased. There was no emergency reserve fund in place. There was no savings account, and there was no contingency plan in case one or both spouses lost their jobs. Though there are a thousand different variations of that story, the end result is often the same: failure to plan for the worst resulted in planning to fail the home ownership test. Who said that you have to own a McMansion? Who are you trying to impress… and why?

Wardrobe is another area where people tend to spend excessively. No one is questioning whether or not clean, warm clothing is essential, however designer labels are not necessities. Clothing can be a big budget buster. 

I have studied books about frugal millionaires who live like paupers; eventually growing too old or decrepit to enjoy their wealth. I’ve also read articles and books asserting that Christians are not supposed to have, enjoy, and maintain wealth. I disagree. I believe that Christians are supposed to have all that God has made available for us. We see examples from the Old Testament to the New Testament (from Solomon’s regal raiment to Jesus’ seamless robe) that indicate quality clothing is important, but it has its proper place. Yes, looking good and having nice quality clothing may not be cheap, but there are things you can do to minimize wasteful spending on clothes: 1. buy sale items. 2 clip coupons 3. save where you can by spending less on general items like socks or pantyhose, or purchasing them in quantity for discount savings. If you are willing to look for a solution, there is always a way to save more money.

Notes from The Financial Shepherd: Why Dollars + Change = Sense

There are some people who just get it right. They read, study, listen, and learn everything they can about finances and then put that knowledge to work and allow the money they save and the power of compound interest to work wonders for them. 

One client in particular comes to mind. He is single and has saved on his own for years. He earns approximately $150,000 per year and saves 50 percent of his income. At age 40, he had already amassed more than $1 million. He invested most of his money on his own by reading various books about the “buy and hold” strategy and diversification. However, when the market dropped in October 2008, he sold at the market’s lowest point and didn’t get back in the game. When we met to discuss his finances, he shared with me that he knew that he should not have sold, but emotionally he could not stomach that level of risk. Fortunately, he gave me permission to take over his investments, since I had no personal or emotional attachments to his money. 

In March 2009, we noticed that the market was beginning to turn around, so we bought several investments on his behalf. When he received the online statement, he immediately called me to confirm that the information was accurate. It was. Six months later his entire portfolio had increased by 400 percent. While this clearly doesn’t happen everyday, listening and learning from others can certainly help. When you build your financial future on a solid foundation, the potential is unlimited.

When it comes to money, think of it in terms that every decision you make in life is also an economic decision that can inflate or deflate your financial future. In the world of finance, it is often said that the greatest invention in mankind is compound interest, which is the interest calculated on both the principal and the accrued interest of an investment. Compound interest means that each time interest is paid, it is added to or compounded into the principal amount and thereafter earns interest also. The ability to have your assets actually work for you is amazing. One of many lessons we can all learn from wealthy individuals is how to stop working for money, and let our money work for us. 

I worked for a big financial services firm before I started Worth Financial. Next door there was a very successful mortgage company. I remember the senior broker/owner telling me that he made about $400,000-$500,000 per year in profit.  We talked from time to time, and he said he would use our firm’s services to do some financial planning, but he never did.  

One day we were having a conversation, and I remember he told me that he would never have a car note; rather, he would always borrow against his home. So he bought expensive cars by taking equity out of his home. In actuality, by doing this, he was unfortunately financing his car for 30 years. So instead of paying $84,153 ($60,000 purchase at 7% for 5 years—which is high enough), he ended up paying $456,735 ($60,000 at 7% for 30 years)! When I saw him a few years later, he informed me that he had closed the mortgage company and filed for bankruptcy because he didn’t save enough money and had taken on too much debt. It’s no surprise that the story ends that way because that is one of the familiar traps many people fall into without a solid financial plan. Personally, I don’t want anyone else to go through a situation like that. The key to unlocking the door of compound interest is to use it for good and not for evil (i.e., building a solid investment portfolio versus pouring money down the drain of depreciable goods).