Our Spring blog series includes excerpts and basic financial lessons from the book In A Most Delightful Way, by our founder and CEO, James Twining, CFP®. The book aims to explore and simplify concepts based on the author’s own recollection of his early life and storied career path. The formula includes a story or anecdote (the “Spoonful of Sugar”) as well as “medicine” in the form of a lesson learned. Request a copy of the book anytime from your FP Inc. advisor or staff member.
Spoonful of Sugar: Soup & Crackers
By James B. Twining, CFP®
In my early years as a financial advisor, I met a recently divorced gal named Gwen*. I visited her in her modest home one evening and we talked for a few hours about her financial situation. Her husband had left her with nothing but the house, and the mortgage payment along with it. She had two daughters to put through school and her annual income was in the realm of $20,000. She was already in her late forties and her situation looked bleak. I told her that regardless of how difficult it was to make ends meet, she absolutely had to begin saving some money each month. I scheduled a follow-up meeting for us to complete the account paperwork and get started.
As I walked up to her front door on the way to that second meeting, I remember seeing the look of terror on her face through the living room window. She was absolutely terrified that I was going to pressure her into saving money that she needed for basic things like food and her mortgage payment. And that is exactly what I did. I signed her up for a $25 per month savings program. The money was withdrawn from her checking account automatically each month and it went into an IRA account for her retirement.
Once per year I met with Gwen, and every year she used her small annual raise to increase her monthly savings by just a bit. The second year it was $50 per month, and the third year it was $100. She struggled to pay her bills, but she faithfully continued with the investment program anyway. The market was kind to her over the next fifteen years and I watched as her accounts grew. By the late nineties it became apparent that Gwen was a financial success. She now owned her house free and clear; her girls were finished with college and independent, and she had a sizeable retirement nest egg in addition to a state pension. Gwen is now comfortably retired, something neither of us would have believed to be possible at the start of our relationship.
Fast forward about one year later. I met a man named Jerry, a chiropractor who made $150,000 per year, a significant amount in those days. Unlike Gwen, he would not commit to a monthly savings program. Instead, his habit was to occasionally deposit lump sums of $5,000 or $10,000 at a time into his investments. Unfortunately, Jerry had no discipline when it came to investing, and he would withdraw funds fairly often to make major purchases. Once he bought a fancy house, another time it was a motorcycle, still another time it was an RV.
Twenty years later, Jerry had accumulated nothing. His fancy house was mortgaged, he had no retirement savings, and as far as I can tell he will work until the day his back goes out and he drops from exhaustion. The only other option he has is to sell his house, move into the RV and live off soup and crackers.
The Medicine: The moral behind the comparison between Gwen and Jerry is that it doesn’t matter what you make; it all depends on how you save, and the best way to save is to do it systematically each month. I have very rarely seen anyone accumulate a serious amount of wealth unless it was done automatically each month from a checking account or paycheck. If you think about it, the major assets of Americans are generally accumulated that way: home equity through mortgage payments, IRAs through systematic deposits from a checking account, and 401k plans through payroll deductions.
When saving for any major goal, do it systematically, and make it automatic. Examples:
- A payroll deduction into a 401k account.
- An automatic monthly deduction from your checking account into an investment account or IRA.
- A monthly mortgage payment to obtain equity in a home.
When you save this way, you only need to make the saving decision one time, and you effectively take the savings amount out of your expense stream. The American way is to spend whatever you have, but if it is not sitting in your bank account, you are far less likely to spend it.
It is widely believed that to be successful as an investor you must be very knowledgeable and talented with investments. Some believe that you need luck, and to know how to “time” the market or uncover the next hot stock. The reality is quite different.
Think about other pursuits. What makes a successful athlete? What makes a successful business owner? What about a renowned scholar, writer, or scientist? Is it luck and talent? Well, maybe there is a bit of that. But the people who achieve the greatest success will tell you that there are other qualities which are far more important: A burning desire, a good mentor or teacher, a quest for knowledge, persistence, a solid work ethic, faith, patience, sacrifice, and discipline.
Is it any wonder then that those very same qualities make a successful investor? The most successful investors I know have many of the following characteristics:
- They realize that to succeed, an investor must spend a significant amount of time and work researching the economy, the markets, and securities. If they don’t have the aptitude, time, or desire to do it themselves, they delegate that responsibility to a trusted wealth manager.
- They keep their sights set on the long-term and are willing to sacrifice instant gratification for a long-range goal.
- They have a good work ethic and commit to saving systematically.
- They have the discipline to stay with a proven strategy, and faith in their ultimate success, even when it appears that the markets are not going their way.
*Names have been changed