Don Phillips has a nice article in the February/March issue of Morningstar Magazine entitled “The Things You Can Control.” He suggests that the best advisors help their clients focus on what can be controlled and not fret about the rest even when uncontrollable things are what clients think are the most important. His first piece of advice is:
1. Develop clients’ spending discipline. People too often forget that the real enemy of investment is consumption. It’s far more pleasurable in the short term to spend than to save. We crave immediate gratification. Moreover, our society no longer frowns upon such a shortsighted focus. Thrift is a forgotten virtue. Wise planners get their clients on budgets and try to develop spending discipline early. Overconsumption remains a major problem in the Western world.
As Morningstar Magazine editor Jerry Kerns writes about this article, “few investors have ever ‘asset-allocated’ their way out of a funding hole, but plenty of investors have reached their goals with ‘sub-optimum’ portfolios, provided they’ve saved enough in the first place.”
We could not agree more. Here is a quote from one of our quarterly letters to clients:
While we count on long-term market appreciation, the best way to achieve your financial goals is still by moderating your spending and staying on track with your savings. I write this nearly every quarter to remind you that your financial future is mostly dependent upon actions that are in your control.
Helping clients moderate their spending is an essential part of comprehensive wealth management.
The first step in helping clients moderate their spending is to have a team of advisors who themselves understand the value of thrift and moderating their own spending.
In our Safeguarding Your Money series, Safeguard #8 is to “Avoid an Advisor with a Lavish Lifestyle.” If your advisor has a sports car personality, it can hurt your returns. Wealth is what you save, not what you spend. That’s why an ostentatious and excessive lifestyle is a red flag for an investment advisor: such behavior fixates on appearances. Such an advisor may mislead you in order to maintain the appearance that they are always successful in the markets.
If you are the millionaire next door, you know that frugality is one of the marks of an effective financial advisor. Frugality is built on two principles: having a spending discipline and maintaining a spending discipline.
Having a spending discipline begins with having a budget. We help our clients know how much they need to be saving during their working years and know how much they can be spending during their retirement years. We help them understand the difference between a want and a need as well as to avoid mindless spending by explicitly enlisting the help of those around them and working together with their spouse to live on 65% of their take-home pay.
Maintaining a spending disciple comes from avoiding budget busters: extravagant spending which undoes months’ worth of careful budgeting. We wrote a series of articles on how to avoid budget busters by encouraging the virtue of thrift, curbing your worst impulses, planning on budgeting surprises, and avoiding some of the common budgeting pitfalls.
Without spending discipline, no amount of savings will be able to last as impulsive purchases will draw it eventually. When you have a spending discipline, you can be confident of keeping what you have managed to put away.
Photo used here under Unsplash Creative Commons Zero.