Spending the Right Kind of Money
When I was in junior high, my parents thought it would be a good idea to take my three brothers and toddler sister on a European family vacation.
I’m not sure who was more traumatized by the end of those three weeks – my parents or the Europeans. June in Italy was hotter than June in Louisiana and air conditioning was as common as ice water in restaurants….not happening.
This was pre-European Union, so it was every country for itself. Borders were rather porous, so it was not easy for a 13-year-old riding in the back of a VW van to know when he crossed from one nation to another. I recall trying to buy stamps in in a German post office using Swiss francs. I had no idea where I was.
The pudgy Bavarian postal official with a walrus mustache tried to explain to me in frustrated and very broken English, “Here (pointing to the Swiss franc) is not here! (pointing to the ground beneath his feet).
That was when I learned that otherwise perfectly good money is worthless in the wrong situation (or in my case, location). In those days, the Germans were not interested in having me pay them with Swiss francs.
I have often thought of that experience when I see well-meaning clients trying to spend the wrong kinds of money for a given situation. Here are some examples. Can you see yourself?
RiskLand. When you’re in RiskLand, you’re trying to protect valuable assets from catastrophic circumstances. If your house burns, or your teenager runs over his principal in the parking lot, or you get deathly ill or if you die prematurely, you are a fool if you’ve only been saving dollars into a savings account. You need dollars that multiply (as if by magic) if that certain circumstance comes to pass.
Never try to protect valuable assets with savings dollars or investment dollars. When you want a few dollars to protect a mountain of assets, you need insurance dollars.
ConsumerLand. Most of us spend most of our lives in ConsumerLand. Things are continually being made bigger, faster, smaller, cooler, brighter and maybe even smarter. If you get in the habit of using debt dollars to make large consumer purchases, which you then pay for over time at high interest rates, you’ll voluntarily enslave yourself to a lifetime of payments and making someone else rich.
Using savings dollars to make significant consumer purchases controls overspending, avoids paying interest to others and keeps your budget in balance.
In other words, savings dollars keep you free from debt.
CareerLand. The essence of financial wisdom is gradually moving from “got to work” to “get to work.” To do that, you have to spend less than you make and commit a certain portion of your resulting savings to long-term investments. For most workers, this means participation in a 401K or other similar retirement plan.
Workers in their early to mid-career may be putting funds in a retirement plan that they won’t touch for 20 years or more. This is money they won’t touch now but will touch later.
For that reason, during your highest paying career days, you need to put investment dollars to work in a retirement plan, not savings dollars. Investment dollars can be scary, since they may fluctuate up and down with the natural rhythms of the stock market.
But if you’ve got a well-balanced portfolio in your retirement plan, it ought to balance itself and keep from extremes.
Your job is to put the investment dollars in the plan monthly, monitor it at least annually and let the process work.
RetirementLand. When working days are done and the paychecks stop coming in, you turn your attention to withdrawing funds from your retirement accounts to pay for living expenses.
You’re in RetirementLand! It can be a great place if you’ve got the right kind of dollars to spend. In RetirementLand, you’ll need a variety of kinds of dollars to spend.
You may want to use some actuarial dollars to buy a guaranteed paycheck for the rest of your life. Actuarial dollars are used to buy guaranteed lifetime income annuities, which means you never have to worry about running out of money.
You’re still going to need some insurance dollars and some savings dollars when you travel to RetirementLand. And you can top off your income while you’re there with withdrawal dollars, secured from your retirement accounts. Just make sure you don’t take so many withdrawal dollars that you eventually run out of money!
Our family survived that trip to Europe those many years ago. One of the reasons things went so smoothly is that my father calculated ahead of time the funds he would need in each country, and he had the right kind of currency to spend for each specific country we visited.
That kind of planning makes for a nice trip…no matter where you are.
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