Die Poorer, Live Richer?

 In Financial Planning

As a financial planner, I believe that my clients have only three options with their money. Spend it now, spend it later or give it away. This focuses my main job on helping them find the appropriate balance between these three actions.

We have all repeatedly heard the advantages of saving early in our lives. With compounding and good investment returns, you are increasing the amount that can be spent later by forgoing spending now and saving the money instead. The earlier you start, the more you leverage the resultant extra wealth. So saving early, or rather not spending now but planning to spend later, and doing so consistently and for many years has significant payoff. Likewise, we all seem to easily understand that if I spend it all now or give it away now I will not have anything to spend or give away later.

So what happens “later”. Well our savings, or maybe now investments, tend to take on a life of their own.   They no longer represent our ability to spend later, but become our nestegg, our security blanket, the fruits of our labour, etc., and so on. Many of us tend to forget that our investments started as deferred spending with our then intent to spend it later or give it away later.

Back to my job. When encountering clients that have been saving money during their working lives, deferring spending, I believe the obvious question is what are you going to spend your savings/investments on or who are you going to give it away to. The appropriate questions around how much they desire to be earning on their investments remains not relevant until we understand the progressive use of the funds.

This brings me to one of our clients’ biggest and best investment, their home. They often deferred spending on other things to make the mortgage payment. The mortgage was two parts, one part interest paid and the other part, principal being paid down. For most of us, a mortgage is akin to forced savings. We had to pay down the principal and thus we had to increase our net worth and build equity in our homes. Interest only loans, on a home, are a fairly new concept.

With the unusual rise in values over the last 15 years, many home owners have accumulated significant equity in their homes. As usual, their deferred spending paid off and now they have their “investment” in a home, which is now very significant asset to them. Well, the obvious question is what are you going to spend your savings/investments on or who are you going to give it away to.   To often this question is not being asked or considered.

See the equity in your house is only a different type of investment. An investment never the less. However, we treat it differently. Probably because as home owners it is drilled into our heads, to take the pain of a constricting mortgage to build equity and secure a safe future. No one discussed with us what to do with that equity when we got there.   No one explains how we should spend in the future, the spending we deferred to pay down the mortgage. By default, for many it just falls into the slot of we will give it away. Presumably we will give it away at death to our heirs.

As savers, we would benefit from a plan that was in place before we began saving. This would allow us to properly evaluate the balance between our savings now or spending later. It would allow us to keep our eye on the spending later as it approaches. It would allow us to articulate our intentions to give some part of our wealth away. Most importantly it would make spending our savings and equity in later life a more normal and planned event.

Unless your goal is to die as rich as possible, accessing your wealth in a planned fashion is advisable. You will live richer for it.

Merry Christmas and Happy Holidays to all our clients and readers!

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