Physicians use bloodwork in order to identify signals that point to underlying medical conditions that may not yet be symptomatic. Your financial life emits signals as well, some of which can serve as early warning signs of trouble ahead. It’s important to know what these signals look like and what can be done to correct them.
Are You Financially Ill?
Wealth signals can take on many different forms, but at the top of the list is Overspending. Many years ago, we worked with a relatively young, out-of-state physician with a seven-figure annual income but a very low savings rate. Sometimes income alone isn’t the answer and this was such a case. One day he told me that he thought he was in better financial condition when he was in training as a resident making a fraction of his current income. Despite his extraordinary income, he had done little to prepare for his financial future because he spent almost every dollar he earned. He had tons of debt, very little liquidity, and was living on the edge. Overspending was sending a strong signal pointing him to rough waters ahead. He wasn’t financially well, in fact, he was seriously ill from a financial perspective.
Overspending, of course, is the inverse of undersaving. Overspending plots a course of unsustainability and places you directly in the path of financial stress. Financial stress often leads to intra-family conflict and provides fertile ground for making serious financial errors. Rinse and repeat.
In the example above, serious overspending was literally destroying what should have been a bright financial future, solely because of unquenchable spending desires. You save in order to invest and these invested dollars form the foundation for financial wellness. No savings means you have no financial future. While we constantly tried to help this client focus on the financial resources he needed for the future, ultimately, he wouldn’t change and we had to part ways. We can’t force clients to take action, only help them see the consequences of inaction.
Are You Financially Flexible?
Debt in all its various forms can also be a powerful wealth signal. Debt itself isn’t the issue but the level of debt compared to your mix of assets. Particularly as you begin to see retirement on the horizon, debt can be problematic. Debt limits flexibility and particularly for those nearing retirement, this lack of flexibility can be dangerous.
Overconcentration of certain assets to the exclusion of others can also portend trouble ahead. Too much concentration in real estate, company stock, or simply an undiversified mix of investments can send strong danger signals. Uncertainty is part of the financial markets and sometimes assets can be out of favor for many years. Real estate may appear to be invulnerable at times and the same might hold true for a particular individual stock. The longer lens of history, however tends to correct itself. If you are depending upon these assets to support a particular financial objective such as retirement, you can easily end up having to liquidate these holdings at inopportune times in order to pay for current living costs.
Are You at a Standstill?
Frozen Assets. Sometimes families preparing for the future think that they should avoid any and every risk by “freezing assets” in place. That is, they avoid the stock market and depend on CDs, annuities, or bonds without any growth component. While this approach seems very conservative and safe, this signals a strong probability of a declining lifestyle due to inflation. As the old adage goes “CDs guarantee that you get poor, slowly”.
Learning how to pay attention to wealth signals can help create a sound, strong, and sustainable financial future. Ignoring these signals can do just the opposite. Don’t allow your wealth signals to get out of balance. Start there. Ready for a real conversation?