ONCE YOU HAVE MADE IT, HOW DO YOU KEEP FROM LOSING IT?
Welcome to the final post of our six-part series on investing.
Once you have made it, how do you keep from losing it? This is a genuine question, and we are all too familiar with the sad story of hard-earned wealth being lost due to extravagance, poor management, and bad choices.
I would like to share some key perspectives and tips that have been helpful in managing our finances and keeping us focused on our goals for the future. If you haven’t already, I recommend you listen to or read the previous five blogs on An Investor’s Perspective, Developing an Investment Strategy, Investment Learnings, and Investing and Relationships.
Don’t Try to Keep Up with the Jones’
It could happen that you find you find yourself in a different social class. When this happens, there may be a temptation to increase and acquire much more. When you start making money, it’s easy to justify spending more money, but before you know it, you’ve overspending. I encourage you to hold on to the grounded values and principles you have had for years, especially those you had with less financial independence.
PERSONAL BUDGET’
Set a personal budget based on what you believe is appropriate to spend, and do not spend
money based on what you can afford with your new wealth. Define your goals and vision, always keeping them in front of you.
TRACK MONTHLY EXPENSES
Track all your expenses monthly and pay attention to the money you are spending. Annually, compare what you actually spent last year to your budget. Also, keep reviewing and establishing a budget each year, especially when affordability is no longer the issue.
UNDERSTAND ALL INVESTMENTS
Don’t pursue any investments where you do not completely understand how the money is made. Avoid things that look attractive or even have a good track record but you don’t fully understand. The lure of a great return, if you’re not disciplined, will get you to do things that don’t make sense.
SKILLS AND GIFTS
When you get to the point of becoming a serious investor, it’s important that you maintain your focus and clarity. Use the same skills you used to create your wealth to pursue and oversee your investment strategy. Don’t be lulled to sleep with your newfound wealth, and take your eye off the ball.
TRUST
If you haven’t already, be sure to create an estate plan and move all your assets into a trust. This will help protect your assets.
LIFETIME FINANCIAL MODELING
Model your financial picture for the balance of your life so you have a reasonable understanding of how much you will have at the end of your life. Update your model annually to see the implications of any expenditure in the previous year, changes in your financial picture, ramifications of your future net worth, and your anticipated net worth upon your demise. For more information and resources, visit LifeLightfinancial.com.
PERSONAL INVESTMENTS
When you’re making personal investments such as a vacation home, boat, car, etc., recognize whether the asset will appreciate or depreciate, and account for it appropriately. Also take the time to consider exactly how much the asset will cost to maintain and use annually and whether any additional large expenditures will be required over time. Be sure you include any of these decisions in your budget and LifeLight Financial Model.
INVESTING WITH FRIENDS
Be sure and hold your investment standards at a consistent level regardless of whether you’re investing with friends and/or family. Do your best to avoid any unrealistic biases when evaluating investments. I share more about this in the blog Investing and Relationships.
LENDING
With your increased wealth, you may find yourself in a position wanting to provide a loan to help someone out. In times of hardship, it is prudent to make the loan anticipating it will never be repaid, and consider this up front. If you fully expect the loan to be repaid, be sure you request and accurately document adequate collateral, preferably real estate. I have found documenting the agreement also protects the relationship and encourages the borrower to keep up with payments. Always require a personal guarantee if you desire to be repaid.
CHILDREN
Determine how much to give and invest in your children based on what is best for them and not based on how much money you have or what you can afford. There may be a time you have to allow your child to hit bottom and fail, even though you feel you have enough money to solve the problem. Tough love is not easy to give, but our role as parents is to prepare our children for a tough world.
LIFE INSURANCE
If you currently have life insurance, you may feel because of your new financial independence, you no longer need to carry insurance. Before you stop making premium payments, and cash in on the policy, talk to an expert, as your policy may have a built-in value that exceeds the cash surrender value. As you get older, there comes a point in time, typically between 65 and 70 years, where you can sell your life insurance policy based on your remaining life expectancy. The price can often be greater than the cash surrender value.
I hope you find these blogs useful, and you’re able to apply them to manage and grow your wealth successfully. I encourage you to keep re-visiting them as often as you need to. As you read, begin to incorporate some of these lessons into your investment approach.
It’s always a pleasure to hear from you. If any questions arise, please email me at paul@paulslifelessons.com
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