Your total wealth can be broken down into three categories: Lifestyle money, Accumulated money and Transferred money. Those three categories represent all of the wealth that you will have or lose in your lifetime. Lifestyle money of course is the money that you will spend on maintaining your lifestyle: your home, cars, entertainment, toys, etc. Accumulated money represents all of the money that you will accumulate through savings and investments. Transferred money represents the amount of money that you will give away to other institutions in taxes, interest payments, fees and lost opportunity costs. When we work with clients, our focus is on net gain. In other words, we are looking at the forest rather than the trees. For example, Charlie Brown may come to us and say “I have gotten a 7% return on my investments over the past 5 years, but I’m going backwards. How is that possible?” A review of their finances may indeed reveal a 7% return on his investments, but his net gain may be negative because this client is paying 5% interest on his auto loan, 13.5% on his credit card balance and 6% for on his student loans. In addition, his investments that were earning 7% where in taxable accounts such as mutual funds, which means his actual return is around 5%. Anyway you look at it, Charlie Brown is giving away more money than he is accumulating.
There are two ways to fill a bucket with holes: you can either increase the amount of water that you are putting into the bucket or you can plug the holes so even a trickle will eventually fill it. Our aim is to plug the holes because it requires no pain to your lifestyle money. In fact, most clients find that their Lifestyle money increases as well. Many financial advisors are constantly looking for the next hot product to sell to their clients. Its like they are trying to give their clients Tiger Woods’ clubs instead of teaching them how to swing like Tiger. You don’t need the latest high priced driver if the technique is true.
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