The goal of financial success may not mean the same thing for everyone. For some, it may mean saving a certain amount of money before they reach retirement age. For others, it could mean hitting an annual income level that they’ve always wanted. Alternatively, another person could believe that reaching financial success means having more time in their day to do the things they love and spend time with the people they love most. The reality is that we could go on and on with the different ways in which financial success could be defined.
However, what we do know for sure and can all agree on is that financial success does not just happen randomly. Reaching financial success requires creating a plan and sticking to it. The way in which you define financial success does not matter as much as the plan of action you take to get there. Once you know what financial success means to you, it will be much easier to develop a strategy to get there.
Because financial success is different for everyone, my goal is not to get into your exact definition. However, what I can provide are three overarching rules that can be applied to any way that you define financial success. These rules will help you attain the financial success that you want to achieve. Through this article, my hope is to share my three rules for financial success, which will help you in reaching your goal, however you define it.
1. Saving During The Accumulation Phase
Your working years and the time period before you retire is called “the accumulation phase.” This is where you spend your time working to generate income, with the hopes of accumulating enough wealth to live off of in retirement. No matter how much money you make, if you want to reach financial success, it is very important that you find ways to save during this phase of your life.
One of the most critical tips that I could recommend is to start saving as early as possible. While it is hard to delay gratification, the benefits of saving early can literally compound over time. Whether it be a small amount when you are younger and not earning as much income, the key is to start early and gradually increase your savings rate. The reason why this is so important is because the longer the time horizon to let your money grow, the more you will benefit from compounding returns.
Finally, saving during accumulation is vitally important to your financial success because if you neglect this piece of the equation, you will not have a nest egg to live off of when you retire. While it is true that the cost of living will go down in retirement for some, “your Social Security retirement benefits will replace only about 40 percent” of your earnings. (1) What this means is that if you were banking on not saving much and relying on the government, you will be ill-equipped to cover all of your expenses and standard of living in retirement. It is clear that in order to reach financial success, you must save consistently and accumulate wealth before you retire.
2. Smart Spending During The Decumulation Phase
After prudently saving money during the accumulation phase and now having reached retirement, the next rule is to spend your money in a smart way while in retirement. This period of time, from when you retire to when you pass away, is called “the decumulation phase.” You are decumulating or spending-down the wealth that you have created.
Because you are retired, you are no longer in your prime earning years. This is important because it should put the picture in your head that you now have a fixed amount of wealth that must last you the remainder of your life. If you start spending haphazardly, you run the risk of running out of money.
The best way to avoid running out of money is by creating a budget and a spending plan. By putting these tools in place and talking it through with your spouse and/or family, you will be able to make decisions based on what your plan can afford.
It is important to note that you do not want to go to the opposite extreme, where you decide not to spend any (or much) of the money you’ve accumulated even if you can afford to. Retirees likely just spent almost all of their accumulation years drilling the mentality of save, save, save; once they hit retirement, it is hard to get out of that mindset. The key is to create a budget and spending plan based on your goals, the savings you have, any additional income sources, and your expenses. Once you have that plan in place, it is critically important to stick to the plan.
3. Sticking With The Plan
As mentioned above, it is very important that you stick to your plan in order to reach your goals and ultimately attain the level of financial success that you have defined for yourself.
While you are in your accumulation phase and are just starting out on your financial journey, it is certainly true that circumstances, goals, and preferences will change over time. That is completely normal, so it is impossible to think that your financial plan is set in stone. The key to sticking with your plan as it relates to the accumulation phase is to try and avoid “lifestyle creep.” This has to do with increasing your expenses as your income increases. For example, if you get a significant salary increase, do you automatically buy the expensive car and massive home, or do you keep your expenses relatively unchanged? It is perfectly fine to spend more as your income grows over time. However, when doing that, it is important to make sure that you are not sabotaging your financial plan in any way. A final point to make as it relates to “sticking to your plan” during the accumulation phase is that it is perfectly fine to revisit and refine your financial plan as things change in life. Your financial plan is a living and breathing guide to help you reach financial success, but the key is to stick to the savings, spending, and implementation habits required to achieve your goals.
Finally, the idea of keeping with your plan holds much more weight as it relates to the decumulation phase. Because you are not earning more money during this phase, it is most critical that you stick to the financial plan that has been created for you based on your needs during retirement. For example, if you start spending haphazardly, requiring you to dig into your retirement savings at a much higher rate than your financial plan allows for, you run the risk of outliving your money. This is a tough situation to be in as the earnings potential for most retirees is lower than their prime earning years. Also, if you do not stick to your plan, you may have to make the tough decisions to downgrade your living situation or potentially cancel some of the goals that you have set during retirement.
It is important to map out your decumulation plan before you retire so that you can clearly grasp what is expected for that new chapter in your life after you do retire. The more you understand the plan, the better off you will be to navigate successfully during that time.
The Next Step
Reaching financial success does not happen by chance, and it is not something that occurs overnight. It takes proper planning, delayed gratification, personal finance know-how, and motivation, among many other factors. The three rules discussed above provide a framework for thinking through attaining financial success. I hope you follow them and they help you in many ways. If you are interested in digging deeper and learning about how Fiduciary Wealth Management can help you, please contact us to schedule a phone call now!
About Rocklin Senavinin, CFP®
With nearly 20 years of experience in the financial planning industry, Roc has dedicated his career to helping individuals live comfortably in retirement and enjoy the assets they have spent their career building. He is co-founder of Fiduciary Wealth Management, a fee-only registered investment advisory firm in Little Rock, Arkansas. As a CERTIFIED FINANCIAL PLANNER™ professional, he has advanced training in the holistic process of creating a personal financial plan that addresses a person’s comprehensive needs for the short and long term. To learn more, connect with Roc onLinkedIn or visitwww.fidwm.com. If you have questions, feel free toschedule a phone call using this link.
The views expressed represent the opinions of Fiduciary Wealth Management, LLC and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial, or legal advice or service to any person.
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