The Money Life Cycle
Sometimes people get caught up in the details without a clear understanding of the general case. It is so with money.
The money life cycle is a five-part thing.
- Create money. Usually by earning it, so education, useful skills like communication, motivation and discipline are important. Once it is created, saving some and knowing what to do with that are crucial.
- Make it grow. At least keep it from shrinking. Excessive debt shrinks it and poor investment decisions can too. Protecting it ranks high. The first rule of making money is don’t lose money. Permanent loss not fluctuations. You can over-focus on fluctuations.
- Protect it from intrusions like income tax and helper fees. Tax alpha is an important ingredient. Use what they give you and seek more. Fees are a harder issue. If your advisor keeps you on track, they are worth the price. Managers add value too. Be aware of what you receive before you decide fees are too high. Decide based on value received not price.
- Spend it wisely. When you don’t work, your money must. Spending it involves choosing which of the silos that contain it should be accessed first. It is not equal. Some money is better to spend first. Usually, you can manage your tax rate if you notice.
- Share it effectively. Despite American Express advertising, their traveler’s checks are not good everywhere. Someday your money will belong to others. If you have extra, treat it as a steward would. Maybe early transfer would work better. Investing based on the children’s age and skill factors could be smart too. It does not make sense to manage all your money on old guy parameters. If you are 90, having 5 year’s spending in cash and 5 more in predictable securities would suffice for almost everyone. Anything beyond would be surplus to real needs.
The money life cycle helps to understand the life-long estate plan. Everything you have, or will ever have, will end up spent on lifestyle, given or left to others, or lost. Losing to things like taxes and estate costs are manageable and only some are avoidable. Other losses like using financial tools ineffectively are avoidable if you know how, or know who.
Seek advice. You seldom get good at things you do just once.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.