A client called recently to let me know he was going to make a major purchase. He wanted to know if his purchase was going to affect his investments. After a few clicks through his financial plan, we determined he could make the purchase and it would not have an impact on his long-term goals. He made the purchase.
Over the years I’ve had several conversations with clients about purchasing big ticket items from cars to boats to planes. I worked with a gentleman that purchased a sizable apartment in Paris. He had the financial resources to make it happen and the total cost was a fraction of his net worth. Another individual was building a home on an island in the Pacific Northwest. He was going to turn it into a B&B with Ferrari’s and an airplane (he was a former pilot for a major airline.) After completing his financial plan, I told him he couldn’t afford all his purchases. He had to choose between the home, the cars or the plane.
Lately there has been a lot of discussions, blogs and articles about giving up coffee so you can afford a comfortable retirement. It’s unlikely a cup of coffee will derail your retirement, but I get the spirit of the argument. Spending money on coffee or a Cartier watch makes sense if you have the money.
Money is a use asset. It’s designed to buy goods and services. It doesn’t make sense to die with millions of dollars in your bank account. Of course, blindly spending on things can destroy your financial future. So how do you know how much money you can spend? Here are a few thoughts.
Do the math. The stock market is performing well this year, rising 11.5%. A balanced portfolio of 50% stocks and 50% bonds is up 9.4%. If you started the year with a million-dollar portfolio in a balanced account, you’d be up $94,000. Withdrawing $50,000, $60,000 or $70,000 from your account will not hurt you financially.
More math. If your account is averaging a 5% return every year and your withdrawing 4% from your account, you shouldn’t run out of money. For example, you start with a million-dollar portfolio and withdraw $40,000 for ten years. After ten years you received $400,000 and your account balance is worth $1.125 million. Here’s a real-world example: You invested $1,000,000 in Vanguard’s Balanced Index Fund (VBINX) 25 years ago and withdrew 4% of the account balance each year. After paying taxes and fees, your account balance is worth $2.5 million today, and you received $1.8 million in distributions.
Establish a spending plan. A spending plan, or budget, will help you with your purchasing decisions. Knowing where your money is going is half the battle. Recording your spending habits is a liberating experience. Setting up a slush fund for impulse items will allow you to make stress free purchases. Your budget will also help you with buying big ticket items. The best place to start for your spending plan is to review your bank and credit card statements for the past 6 months.
Create a financial plan. A financial plan is a difference maker. In addition to reviewing your spending habits, it will incorporate your assets, liabilities, hopes, dreams and fears. Most of my clients have completed a financial plan so when they call to ask if they can make a major purchase, I’m able to answer their question in minutes. Also, when the market is falling like it did in December, I was able to tell clients their financial future was not in peril. A financial plan is paramount if you want to succeed financially.
If you have the money and the resources to buy something, go for it! Spending your money is acceptable, especially if you’ve run the numbers and it falls in line with your budget.
An investment in knowledge pays the best interest. ~ Benjamin Franklin
June 13, 2019
Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.
Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. This article has nothing to do with David Beckham. I’ve never met him, and I have no idea how he spends his money.
 Morningstar Office Hypothetical – 5/31/1994 – 5/31/2019.