1. Savings Rate (or Withdrawal Rate, if retired)
2. Investment Allocations (stocks/bonds)
3. Time (before retirement, or until age 95, if retired)
4. Behavior (how you make choices under stress)
While each of the components are important, Savings Rate is placed in the first position on purpose. Without saving from your earnings, you have no financial future. If you don’t systematically convert your dissipating human capital into financial capital, all the other factors won’t matter much.
We call these 4 variables The Personal Wealth Benchmark™ and we utilize these inputs as a way to gauge progress towards long-term financial goals. Think of # 1 (Savings/Withdrawal Rate) and # 4 (Behavior) as the picture frame and # 2 (Allocations) and # 3 (Time) as the picture inside the frame. The frame provides the structure for the other variables to work.
All of these inputs are things that we can control, (with the exception of timeframe after retirement). The aspects that we control dramatically outweigh all of the worrisome pieces that we can’t control. Simply put, it’s a fool’s errand to think that you can impact, much less control the multi-faceted, complicated and interrelated global economic structures. Pile onto that random, outside events and there is no reasonable way to assess all of the uncontrollable factors with any degree of certitude. Yet, the bulk of media coverage each day is on these uncontrollable components.
Your financial future is mostly determined by the inputs that you control…for better or for worse. Financial life can present many problems and often these problems can be traced directly to either behavioral biases or a savings shortfall. The way into the problem (undersaving and poor behavior), can also be the path towards resolving the problem, (increasing saving and better behavior).
Providing discipline and behavioral coaching is a major component of our work with clients. Experience tells us that staying on track is very difficult to do on your own. Ready for a real conversation?