Most of us have a goal we hope to attain with our money. For some of us, it’s a number we’d like to hit. Others of us have an image in our mind – the beach where we want to live, or the golf course we’d like to play daily. Still others simply have an emotion – like peace, or security.
I’ve been helping folks with their financial goals for almost twenty-five years. Often the assistance I try to give is helping someone specifically describe their goal, and then working with them on a plan that could help get them there.
The head of our planning department at Annex Wealth Management likes to talk about the four levers that you have if you want to influence a financial goal:
- You can get a higher rate of return
- You can work longer
- You can save more
- You can spend less
Get a higher rate of return
Many folks see that first bullet point and figure that’s the answer. Certainly, it’s the magnet that attracts most people – which is why, throughout history, it’s the claim that’s been abused the most. In order for the “get a higher rate of return” lever to be truly effective, it would have to offer a legitimate path that allows you to stay within your risk comfort zone.
One example our planners use is, if you’re late for work, you could decide to drive twice as fast as you normally do to get there. You might get to work on time, but the chances that something negative will happen have increased a great deal.
On the other hand, you may be able to take on more risk than you currently are encountering with your investments. We were helping one of our clients recently, and discovered that though she was contributing faithfully to her 401(k), her contributions were actually sitting in cash.
We talked about it and had her experience one of our insightful risk tools, and we discovered she was capable of taking on a good deal more risk than she was experiencing.
Retiring later is a powerful financial lever to consider, because it typically does two things – one, it gives you more time to put away more money, and it delays the amount of time you’d be withdrawing.
Here’s a simple example to illuminate my point: if the annual amount you intend on withdrawing in retirement is $100,000, and you’ve been contributing $25,000 a year, working an extra year has added another $25,000 to your savings while $100,000 has not been withdrawn. Two years of that is a difference of a quarter of a million dollars in your financial plan – a healthy amount for anyone.
Of course, there are things to consider, like taxes, pensions, and Social Security, but we sometimes overlook the simple math involved in financial decisions.
In my experience, this is the lever that most often involves the idea of “catching up.” Some studies show that people start thinking of retirement in their middle or late forties, when we all should start thinking of retirement when we get our first job.
If you haven’t considered saving for retirement and you’re in your forties, look to make some “catch up” contributions. Is it feasible to put an extra thousand in an IRA? Many of us with 401(k) accounts can increase our contributions by thousands. The key is to find opportunities to save that allow you to address your inactivity through the past years.
Spending less may be the most powerful financial lever for several reasons. Firstly, it helps you audit your life and realize what you value and don’t, and whether you’re spending on things that really matter or not. There’s a real psychological benefit to that sort of self-discovery.
In addition, spending less allows you to see immediate results. When you find a cheaper option for your internet service or the best deal possible for purchases, you immediately see the difference. But as you increase your ability to save money, you decrease the amount of money you have to save.
Over the years I’ve been helping people, no matter their spot in life or the amount they’ve saved, I’ve found that some are excellent at handling all four levers – and some have never considered touching them.
When you’re serious about your goal and how you’ll get there, walk through these four levers, or find a financial professional who can help you work through them.