Freedom via Frugality

Fireworks sales are expected to top $1.3 billion this year, according to USA Today.  While that’s interesting, allow me to do what I can here to help you afford to celebrate your own financial independence.

As a financial advisor since 1979 I feel blessed to be a coach where I can be of help to those who are determined to plan their financial success.  It is just as satisfying to work with those where the household income is $40,000 a year as it is to bring options to the table for those making well over a million dollars every year.  The concerns and fears are often identical.  No one wants to run out of money, the way they prefer to spend it, before they run out of time. One of the problems with the securities industry is that most of the resources are dedicated to the rich.  While such practice is understandable at the company levels, it is not meaningful when it comes to average Americans.  It has been even less valuable to many people of color.

The deaths of unarmed black people by white police officers are renewing attention to the ways minorities, to include African Americans and Latinos, have been failed by so many things from policing to public health to job opportunities.  As a result of those factors, Black Americans have a median household level of wealth that is approximately 10-times lower than our White fellow citizens, according to the Quartz Survey of Consumer Finance, June 2, 2020.

Investing in the stock market affords one no guarantees for getting rich, but it is well documented that equity ownership has helped savers accumulate assets by virtue of long-term, well diversified holdings.  “Over the past 20 years, the S&P 500 Index of large US stocks has generated about 6% annually, a return that would turn $500 of monthly investment into more than $20,000 of additional wealth (before taxes) in 10 years, compared to keeping that money in a no-interest checking account,” opines John Detrixhe & Dan Kopf at Quartz.

While White Americans account for around 60% of stock ownership, Latinos and Black Americans are far less represented in holding financial assets.  According to data from the Federal Reserve, Latinos hold approximately 30% of stocks and Black Americans hold 28% of their net worth in equities. The wealthiest 10% of U.S. households owned about 83% of such holdings in 2016, per the Federal Reserve Bank of St. Louis, which accounts for the largest piece of the stock market pie.

This is not a recommendation to do what so many Millennials have been doing this year.  Perhaps due to the lack of being able to gamble in Vegas or at a race track, it appears there are a large number of small accounts being opened lately where new traders have arrived on the scene with fresh cash.  There is a marked difference between being a stock trader looking for the high of a quick gain and an investor who is working on securing enough assets behind door Number 1 to maintain their lifestyle for another 20-30 years after their last paycheck.

I do have the same recommendation for you as I have given my sons when it comes to loaning money to peers, friends, and family.  Before loaning anyone any money for any reason, ask yourself if you can afford to make it a gift.  If the answer is ‘Yes’ you have the right attitude for making a loan.  The fact of the matter is, you may never see that money again.  Never is a long time.

One of our clients recalls her Aha moment when she realized she had to climb her way out of the $20,000 credit card debt hole she created.  The first thing she decided to do was to stop making the hole deeper. She discovered that math is a four letter word with which she was determined to use often.  And this notion of budgeting, while distasteful at first, was a practice that she needed to embrace.  She discovered she had grown way too accustomed to a lifestyle beyond her means and was not used to restricting any of her purchases. Which is, of course, how she had gotten herself into this situation. But the eye-opening discovery changed the way she viewed her finances forever.

Take 15 seconds to answer 3 questions:

1. Do I have the money budgeted for that purchase?

2. Do I have the money saved for it?

3. Can I live without it?

As Frugal Rules put it, “If the answer to those first two questions is yes, then I have the freedom to buy whatever it is. If the answer is no, then I ask myself the third question, which will almost always be yes. If the latter is the case then I can easily say no to the purchase decision. These parameters give great freedom and clarity when posed with the opportunity to purchase something.”

With all of the uncertainty all over the world these days, there are two things you can do to bring some order into your life.  Take the time to budget what you spend.  And begin setting aside cash for emergencies, along with money to make work optional.  Start small, make a promise to yourself that you will increase your contributions to your retirement plan every year by no less than 1% of your gross income.  Depending on how much time you have before your last paycheck you may need to invest 10%-25% of your income at the beginning of every month you are earning money.  Since you are the captain of this ship, repeat until retirement.


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