I talked yesterday with a friend who started a wealth management firm. He built his firm targeting individuals and families with significant wealth, in the $20m to $100m range, and he manages over a billion dollars of assets today. Let’s call him William.
William’s customers are not the millionaire next door. They’ve had incredible good fortune, in business, on the athletic field, with media, and through many different venues that have put them in a uniquely privileged situation.
Anything is possible with more money… right?
Picture yourself with $20m in your bank account. How does that feel? Anything is possible, right? Spending becomes irrelevant. No need to balance the checking account! The world is your oyster. Your problems go away.
Well, not quite. Let me dispel those myths working backwards.
First, once you’re living above the poverty line, the rates of divorce, depression, cancer, heart attacks, accidental death, and any number of ailments don’t improve. The tragedies and heartaches in life do not discriminate.
Even worse, you can’t buy more time to live longer. Your life expectancy is about 80 years if you’re born today. That leaves you with 700,000 hours. You can’t buy more life hours at a rate of $10 per hour, and not at a rate of $10 billion per hour. Time is the scarcest resource. You can improve your life expectancy with a healthy lifestyle, but you’re still on the clock: 700,000 hours.
Who cares about spending?
So we’ve agreed that money doesn’t solve life’s most challenging problems, but surely having $20m would mean you don’t need to worry about spending. You can cancel your Tiller subscription. You can spend with reckless abandon. You have enough money for anything!
Well, I’m sorry, but the answer there doesn’t look good either. Even though William manages money for families with $20m to $100m, his work starts with spending. In fact, that’s why he called me. He needs a great tool to help his clients manage their spending.
His toughest challenge isn’t how to squeak out extra alpha in their investment portfolio. He’s good at that. His bigger challenge is helping his clients adjust their habits so they spend according to their goals, values, and means.
When he begins a new client relationship, he asks, “how much are you spending a year?” A typical client will respond that they’re spending $300k to $400k per year. When he looks into their accounts, he almost always finds they’re actually spending about that amount each quarter, for a more stunning $1.5 million a year. Their property taxes alone might total $400k.
When ignorance is not bliss
The bottom line: they have no idea how much they’re spending, and they’re spending much more than they think. If you’re sitting on $20 million and you’re spending $1.5 million, you are on track to depleting your accounts, no matter who is managing your money.
So the spending myth is hopefully slayed. Spending is not something to manage only when we’re in college, only at our first job or only while we’re in debt. No, spending is something we manage for our entire lives.
That’s not a bad thing. In fact, this is wonderful news.
Spending for financial freedom
First, money is privilege. If we earned $10, we now have the privilege and responsibility of spending that $10. That privilege and responsibility doesn’t change if we add more zeros to the sum. Live up to that privilege and responsibility and spend wisely.
Second, spending is the path toward financial freedom. So long as we’re spending less than we make, we create financial freedom. We can see that we’re growing our assets. We can make progress toward the future. We can save and share money with charities we care about, children we love, and our own future needs.
Finally, managing our spending shouldn’t be a hassle. With the right approach, it should average to a few minutes a day. We might spend eight or more hours of the day making money. Isn’t it worthwhile to spend a handful of minutes tracking where it goes?
The most financially successful people commit to tracking their spending, even though they’re wealthy. The safest drivers commit to wearing seat belts, even though they drive responsibly. What commitments are you going to make and keep about your money?