Over the last several weeks, we've gone in-depth with three different fictional families—the Spendy Spellmans, Balanced Bennetts, and Frugal Franklins—and examined how vastly different a family's financial foundation can be despite having the exact same circumstances as their peers.
To refresh, here's what we've covered through the first four parts:
- Part I: We got to know each of the three families at a high level, looking at their financial inputs and outputs and seeing how that translated to current-year savings.
- Part II: We went in-depth with the Spendy Spellmans, examining a list of changes they'd need to make in retirement to correct for their overspending. We also looked at an alternate scenario that would limit the Spellmans' retirement changes by making changes in the present day.
- Part III: Unlike the Spellmans, the Bennetts were in good shape when they got to retirement, thanks to their balanced money habits. Instead of recommending cutting back in an alternate scenario, we explored optimizations to even better position them for retirement.
- Part IV: Similar to the Bennetts, the Franklins were in great shape for retirement. In fact, they were on such strong financial footing that we posed three options in an alternate scenario, involving spending more before retirement or retiring sooner.
There were many variables at play for each of our fictional families, some of which may not apply to your situation. Regardless of which family you may most closely align with, there are five lessons we can draw from our fictional example.
High income doesn’t guarantee wealth
As we saw with the Spellmans, Bennetts, and Franklins, the same level of income resulted in three very different financial situations at retirement. Being considered a high-earner doesn’t automatically mean you’ll be wealthy in 35 years.
Ultimately, wealth boils down to how much you spend versus how much you save. While our example covered three families making substantial amounts of money, it bears saying that you don’t need to make $300,000 a year to generate wealth, especially if you have a sound financial plan.
If you can commit to these three things, you'll be well on your way to building your own wealth.
- Maxing out your employer-sponsored retirement plan, or contributing as much as you can within your ability to do so, and taking full advantage of any employer matching.
- Spending what you can afford on housing, not what you would like to afford. This can be challenging in the current housing environment, but you should aim to spend 30% or less of your income on housing.
- Developing a monthly budget and seeing where you can cut back on expenses if you are outspending your income.
Building wealth takes time
We fast-forwarded 35 years in our example because it can take the passage of time to truly see the impact of various lifestyle and financial habits. There will be differences between each of the three families at one year, five years, and 10 years, but those differences are far more pronounced by the time they retire.
The same holds for building wealth, generally speaking. Your net worth will be different in one year, five years, and 10 years. It will take time for that net worth to grow. It all stems from having a solid financial plan and committing to it over a long period before you reach the ultimate payoff.
Trying to fully understand something, like retirement, that is decades in the future, can be challenging. And for something so far in the future, it's easy to put off changes when they may not affect you here and now. One of the key benefits of working with a financial advisor who engages in comprehensive financial planning is their ability to help you visualize retirement through modeling and analysis. If you need to make changes, a financial planner can demonstrate the various scenarios—like what took place in "A Tale of Three Families"—and provide more exactness to what can be a fuzzy picture.
The sooner you make changes, the better
It’s hard to imagine a scenario where failing to have a plan or making changes earlier in life would result in a worse financial outcome. As the saying goes, failing to plan is planning to fail.
Now, you may not necessarily fail by investing on your own. And you may do well without a comprehensive financial plan. But these fictional examples are meant to illustrate the overarching theme that getting a start sooner will make things easier later. Even if you simply start investing in retirement sooner (like with the kids’ Roth IRAs), the compound interest over the extra time can have a profound impact.
The benefits of having a financial advisor go beyond money
In our examples, we baked into the equation the presence of a solid investment manager. But what if all three families were DIY investors with an average personal finance background? Though working with a financial professional doesn’t guarantee better financial outcomes, there are many other benefits to working with a financial advisor beyond dollars and cents. And right at the top of that list is peace of mind, knowing someone is looking out for you, your hard-earned savings, and your best interests.
Yes, the Bennetts and the Franklins would have lived comfortably had they never made the step to working with someone providing both investment management and financial planning. But for years, they worried and felt unsure about what might happen at retirement. Unknowns can create a lot of negative feelings. One of the great benefits of partnering with a financial advisor you trust is that you receive guidance and reassurance that you’re on the right path. If you stray from that path, you have someone who spots the deviation and works to get you back on track. Yes, having more money in your accounts is great, don’t get me wrong. But lifting the weight of worry off your shoulders is an incredible benefit.
On that subject, two of the most common benefits I hear from my clients are:
- A financial advisor keeps them from making big mistakes that are not well-thought-through (either investment or planning-wise), and
- A financial advisor gives them peace of mind that they are doing all of the right things and on the path to a fruitful future.
There are differences between financial advisors and the services they provide
For the sake of explaining things clearly, I referred to all three families working with an investment manager. In reality, the investment manager may refer to themselves as a financial advisor, too.
As you’re considering partnering with a financial advisor, it’s important to understand the differences between them and the services they provide. There are "financial advisors" who sell insurance and/or get paid for the products in which they invest for clients. There are also financial advisors who must adhere to the fiduciary standard and only get paid through a fee. Yet, they all may use the "financial advisor" title. Because there's very little governance of the title, the onus is on you as the consumer to do your due diligence.
If you have questions about any of the topics I covered in this piece or would like guidance on your own financial future, don’t hesitate toreach out to me orschedule a free consultation.
About the author
Carla Adams is aCERTIFIED FINANCIAL PLANNER™ practitioner who specializes in helping women build strong financial plans around their equity compensation, including Restricted Stock Units (RSUs) and company stock options. With over 15 years of experience in financial services, Carla has in-depth knowledge and expertise geared toward helping clients with complex financial situations. She enjoys boiling down complicated scenarios through practical examples and down-to-earth conversations.