Get Wealthy / Stay Wealthy

Get Wealthy: Take Risks / Be Optimistic / Put Yourself “Out There”

Stay Wealthy: Staying Humble / Frugality / Paranoia of Losing Wealth as Quickly as It Was Made

Two drastically different mindsets and methods of execution. Morgan Housel devoted an entire chapter to this very topic in his book “The Psychology of Money.”  

“Michael Moritz, the billionaire head of Sequoia Capital, was asked why Sequoia was so successful…:

Moritz: I think we have always been afraid of going out of business.

Interviewer: Really? So its fear? Only the paranoid survive?

Moritz: There is a lot of truth to that. We assume that tomorrow won’t be like yesterday. We can’t afford to rest on our laurels. We can’t be complacent. We can’t assume yesterday’s success translates into tomorrow’s fortune.”

-Morgan Housel’s, “The Psychology of Money”

In last week’s article, we defined wealth as financial independence, which simply means placing no reliance on a job or anyone else to maintain your chosen lifestyle. Notice there is no dollar amount, no status achieved, no pinnacle accomplished included in that definition. By design, I would argue that in our culture, we closely define freedom with financial independence. This freedom does not happen overnight. Rather, it is accomplished by taking advantage of the everyday small value additions that compound over a lifetime.

I would like to take you through a real-life client case study of what staying wealthy looks like. Remember, financial independence is not a uniformed dollar amount for all, but the dollar amount that allows a household to have no reliance on a job or anyone else. That cannot be stressed enough. Note names have been changed for privacy.  

When we first met Jason and Brittany, our company walked both through the firm’s entire value proposition, everything from our investment expertise, risk management, and after-tax planning.  We discussed topics such as Roth IRA conversions, tax loss harvesting, 1099 income and how an Individual 401k can save big tax dollars. We talked through the necessity of creating a financial structure for their household, how they should eliminate debt, put in place appropriate liability insurance, and prioritize a protective reserve. As always, we gave them a lot to chew on (maybe too much in hindsight, especially since this meeting was done over Zoom).

The meeting ended, and action items were disbursed to each party: Potential advisor to await a response, household to take time to decide.  

Around 48 hours after the meeting, I received a call from Jason. You could tell that him and his wife have been deliberating this decision extensively. Rightfully so – the decision to trust someone to provide advice on how to steward one’s accumulated financial resources should be given a household’s utmost attention. I was expecting to hear them agree to partner with us, but was met with a couple more questions. Totally fine – and welcomed.  

I do not remember the first few questions – but the last one sticks out to me like fireworks on the Fourth of July. “Josh, what are you going to do with my money?” Translation: How are you going to grow our money, while also protecting our hard-earned resource?

A sense of calmness came over me, and I am not entirely sure why. The obvious emotion most people would relate with when asked this question is fear. Couple this with panic based on the rhetoric of “Was I unclear in the meeting?” and these emotions could cause an individual to fumble. Fortunately, cooler heads prevailed, and I responded with: “Our goal is similar to Warren Buffet’s – get rich slowly.” Jason repeated the last three words after I said them, we exchanged farewells, and ended the phone call. The next day Jason called, and the partnership was formed.

Looking back on this conversation, I would have loved to change the last three words to something like; ‘manage your net worth’, ‘unlock your human capital’, or ‘build you your financial structure’. All of them would have been more appropriate, as that is how you let compounding interest work and build wealth over time. Charlie Monger, longtime business partner of Warren Buffet stated this: “The first rule of compounding: Never interrupt it unnecessarily.” I was not confident that Jason would understand that to let compounding do its thing, we must first build a financial structure.

Luckily, the message received by Jason was something to the tune of ‘I can trust AWM because who tells you the goal is to get rich slowly?’

Over the past few years, this household has been able to execute necessary planning strategies to build their financial structure:  

Net Worth Building:

• Paydown of almost $200,000 of student loans
• Refinance their primary home mortgage to reduce their interest rate by 1.35%
• Fund their protective reserve – they have effectively funded 3 years’ worth of their current lifestyle. Short term market corrections, or acute distress, have been planned for.

Retirement Planning Strategies:

• Create non-deductible IRA conversions
• Open a tax-deductible Individual 401(k) plan for both Jason and Brittany (it pays when both spouses have 1099 income!)
• Max out Jason’s employer sponsored 401(k)

Tax planning Strategies:

• Take advantage of Safe Harbor Withholding  
• Prepare Multi State Tax Returns
• Execute Tax Loss Harvesting - during the market reduction in March 2020 due to COVID19, Jason and Brittany were able to take advantage of harvesting hundreds of thousands of dollars of losses from investment positions. These losses are now ‘banked’ for future years to net against investment positions with capital gains – said differently, Jason and Brittany will pay no taxes on capital gains up to the losses banked.

All this planning is no doubt exciting and the true value proposition of an advisor – but these planning techniques exclude the most important factor, which is entirely outside the advisor’s control.  

Jason and Brittany have made a conscious decision to stay wealthy by how they approach their everyday decision making. They have decided they will save for their defined outcomes and spend less than they make on an annual basis – for tomorrow is not guaranteed. They and Michael Moritz of Sequoia have the same mentality – they do not assume yesterday’s success translates into tomorrow’s fortune. And this key factor is what sets them apart.

Conclusion:

Financial Independence is an ever-moving target. Lifestyle decisions can seem overly complex, but when we work to simplify things, households have two options to achieve their desired lifestyle outcomes:  save more or earn more. My challenge to you is this – partner with a trusted advisor who will help keep your current wealth by building your financial structure, help unlock the value of your human capital, and get rich (whatever amount that is to you) slowly.