Whether you came into your wealth decades ago or you recently found success, there comes a time when you’re no longer worried about making your month-to-month rent and grocery bills — and you start to think about something more.
Once your quality of life isn’t in question, financial wealth is about something more than just the bottom line on your balance sheets. You begin to think about your life goals, your spouse, your children, your extended family, and your business legacy.
The ConnectView Approach to Managing Your Wealth
At First Western Trust, we take a holistic view of your unique situation by looking at your wealth in four different categories: Financial, Relational, Experiential, and Legacy wealth. These quadrants all feed into and rely on each other, and each one is vital to the overall picture and story of your wealth. Every investment, real estate holding, trust, or philanthropic endeavor connects to the rest.
- Financial wealth is the foundation that supports the other three quadrants. With purposeful investing and intelligent risk management, we can help you preserve and grow your financial wealth in a way that aligns with your individual interests and values.
- Relational wealth is all about the people in your life — your family, your colleagues, your network, your community, and beyond. It’s the bridge between your personal and professional lives.
- Experiential wealth is the enjoyment and quality of life you are able to appreciate, thanks to your financial wealth. The adventures and experiences that bring joy to your life and enrich your lifestyle cost money, and focusing on this quadrant will help you optimize your financial plan to give you the best roadmap for your future.
- Legacy wealth is the impact that you leave behind after you’re gone. We can help you define the purpose of your wealth — whether you want your money to go to your spouse, your children, your business, your philanthropic interests, or any combination of the above, you need a plan.
Chapter One: The Importance of Financial Wealth
Financial wealth is the accumulation of your wealth to date and serves as the foundation for the rest of your financial goals. Once your financial wealth is secure, you can focus on the other three quadrants, but no matter what you want to do with your money or what kind of legacy you want to leave, financial wealth comes first.
Now you are ready to start to think bigger. You can secure a comfortable retirement for yourself and your spouse. You can ensure that your children (and grandchildren!) have access to the finest education they could want. You can help guarantee the future of your business or of startups that you believe in. You can support the charitable causes that you find most beneficial to your community and the world, both during your life and after it.
Chapter Two: Assessing Your Financial Situation
You can’t set financial goals unless you know where you’re starting, and it’s easy to get scattered in your finances. You probably have checking accounts, savings accounts, brokerage accounts, IRAs and/or 401(k)s, insurance policies, CDs, trusts, credit cards, and any number of others — dozens of accounts in total.
When is the last time you ensured that all the financial aspects of your life are aligned? Do you know how much is in each of them, and how much each is earning in interest or other returns? Most importantly, is your money distributed in the most effective way? If you’ve built your portfolio gradually, adding pieces here and there, you might not have thought about how everything fits together.
It’s important that you understand how all your various assets, liabilities, and goals fit together. To do that, you need a complete view of your finances. We recommend re-assessing your finances at least every three years, or when you’re about to make a decision with major financial implications — selling a business, approaching retirement, buying a new property, and so on.
Planning your finances also means taking stock of your goals. What are your goals? Are you still on track to meet them, or do you need to adjust them? Have your priorities changed? A financial assessment will align your past experiences with a defined purpose of future wealth.
Taking a Personal Financial Inventory – It’s More than a Number
The first step in assessing your finances is to completely understand your financial situation — you can’t make a plan for what to do with your money unless you know what you have and where it is. Every time you assess your situation, you should be looking into:
- Assets — a comprehensive list of all the assets you have, including both liquid assets and illiquid assets that you have no intention of spending any time soon. This includes checking accounts, savings accounts, retirement accounts, emergency funds, investment accounts, and physical assets like real estate, cars, artwork, and jewelry.
- Liabilities — another comprehensive list of your debts, expenses, business debts, credit cards, mortgages, and any other loan payments.
- Insurance — a lot of people buy insurance policies for home, life, health, auto, umbrella, long-term care, and so on individually, without taking the time to examine how they interact. As a result, they’re paying for overlapping coverage and failing to notice gaps.
- Cash flow — an assessment of how much money is coming in and out, where it’s going, and what you want to use it for.
Think About Financial Goals – The Road Ahead
Once you have evaluated all of the assets you’re working with, you can sort your financial goals by short-, mid-, and long-term goals.
Short-term goals are going to play out in the next year or so. They might include paying off business loans, new investment goals, or preparing for an unusual tax situation.
Intermediate goals will take a few years, but they’re worth getting in front of. They might include budgeting for a new insurance policy, buying a new property, making a major business investment, moving to a new city, or changes in your family.
Long-term goals usually break into one of two categories: retirement planning and estate planning. It’s never too early to start thinking not just about when you want to retire, but what kind of lifestyle you want to have when you do. That usually involves starting backward with a monthly or yearly budget for retirement and determining how much you need to set aside today to make that happen.
If you’ve already retired, great! But you can’t plan for everything — a medical emergency or half a dozen grandchildren might not have been in your plan 20 years ago — so it’s still worth examining your finances and determining how to optimize them for your lifestyle going forward.
Whether you want your wealth to go to your family, your business, your charitable interests, or any combination of the three, you need to make a plan ahead of time. Estate planning may seem like the last plan you need to make but in fact this is an ever evolving plan that changes and adapts along with your goals. The current rules and regulations already have a plan for your estate when you’re gone — if you want it to go somewhere else, we can work with you to create a plan that ensures your estate goes where you want it to.
Giving With Purpose
One of the best benefits of careful financial planning is that it enables you to support the causes and values that are most important to you. For a lot of people, that’s the school they went to. For some, it’s the schools that their kids attend. For others it’s a humanitarian charity, an animal rights group, or a religious organization. In any case, financial wealth (and a little foresight) can help you put your money to good use.
Donor-advised funds (DAFs) are another popular way to reduce your tax bill while simultaneously maximizing your charitable contributions. In essence, you get an immediate tax benefit in the short term, but the fund is able to keep making charitable donations long after your income decreases.
Part of your financial plan will involve making sure that you can give your spouse, children, and even extended family the life that you want for them. Sometimes it’s as simple as buying a vacation home. Sometimes it means planning ahead for the rising cost of tuition. And sometimes it means looking ahead to after you’re gone, setting up trusts and inheritances to make sure that your money and legacy outlive you.
If you’re fortunate enough to give to others, you should make a plan to do that. Family goals also apply to anyone supporting parents, relatives, or anyone else in need of assistance and special care. It’s well worth your time to do the research into insurance, long-term care, and the costs of keeping them happy and healthy.
Reviewing and Rebalancing Your Portfolio
Most of us aren’t day traders, nor do we want to be. You may have a significant amount of money in brokerage accounts, but you’ve probably left the day-to-day management in the hands of a broker. This is a good time to check in, see how your investments are doing, and understand the fees you are paying.
Is your current portfolio aligned with your goals? Allocation is the first thing to think about. You might have invested heavily in certain sectors years ago, only to lose track of them when markets and trends change. Look over the asset classes you’re carrying and whether any of them are incurring unnecessary expenses, high risks, or poor returns. Talk to your broker on a regular basis and ask them how the various portions of your portfolio are doing. You can even hand off your portfolio to someone that will dedicate more granular attention to it.
Chapter Three: Investing With Purpose
There’s more to investing than just depositing money in your brokerage account and waiting for the balance to go up. At First Western Trust, we believe in investing with purpose — creating and using an investment portfolio that meets your goals and reflects your ethics and values.
Luckily, it’s easier than ever to keep your investments in line with your principles.
Work with your portfolio manager to put together an Investment Policy Statement that reflects your goals and values so that they can make informed portfolio moves going forward.
Investing in Stocks
If you’re a savvy investor, then the stock market isn’t new to you. Most likely, you’re either heavily invested in the stock market, trusting in the power of the free market to turn wealth into more wealth, or you’ve decided to put your money elsewhere, given the inherent instability of the market. Here are some things to consider when you’re deciding whether to put your money in stocks.
- Unmatched rate of return: Short of a really good run on a roulette table (which we don’t recommend as an investment strategy), there’s basically no faster or more reliable way to accumulate wealth in the medium- and long-term than the stock market. On average, you can expect a return of around 10 percent (not accounting for inflation).
- Short-term volatility: The DJIA fell 50 percent in 18 months during the 2008 financial crisis, then recovered two years later. It rose 3,000 points in the months leading to President Trump’s inauguration, then fell 2,500 in the following week. Over a long enough period of time, stocks always rise, but if you’re hoping to predict what the market will do in a month or a year, you’re taking a huge risk.
- Be aggressive if you’re young: the longer you can leave your money alone, the more aggressively you can invest. If you’re planning on working another few decades, you can put more money in stocks because the bad years will be ironed out by the good. If you’re planning on selling in a year or five, stocks might not be your best bet.
- Turning crisis into opportunity: a loss isn’t a loss until you sell. It’s easy to hyperventilate when you see the balance on your investing app drop by tens or hundreds of thousands of dollars, but those losses aren’t “real” yet. Even the worst crashes in recent memory have recovered in a matter of a few years. Take the opportunity to buy up cheaper stocks and index funds and wait it out.
Chapter Four: Managing Financial Risk
With virtually every investment comes risk. As a rule, the greater the return you can expect on an investment, the greater the risk you run. That’s why it’s so important to carefully plan how you’re going to diversify your portfolio so that you’re running risks in some areas but not in others.
The simple way to think about risk is to ask two questions: how soon do you need the money, and what is your temperament towards volatility? If you’re young and intend to keep working for a while, you can take greater risks in the pursuit of better returns. If you’re already retired and want to stretch your funds, you don’t want to risk what you already have, so you’ll want to invest in lower-risk options.
Behavioral finance is a different way of thinking about risk. Traditional models of financial theory assume that people are rational about risk and have perfect self-control, uninfluenced by bias.
For example, let’s say you’re offered the chance to flip a coin. If the coin comes up heads, you’ll get $100. If it comes up tails, you’ll lose $100. A perfectly rational actor knows that the coin toss is completely neutral, but for most people, the risk of losing is worse than the possible gain of winning.
Behavioral finance attempts to take into account that investors aren’t completely rational and that many cognitive biases are in play when people make financial decisions. It involves careful planning, preparation, and statistical analysis to try to remove biases from the decision-making process entirely.
The Bottom Line
Financial wealth is complicated — if it weren’t, there’d be no such thing as financial advisors. But complicated or not, financial wealth looms large in most people’s lives. It determines so much about your lifestyle — the quality of life you’re able to have for yourself, the quality of life you can give your children, the frequency with which you can vacation, the education your children can obtain, the charitable causes you can support, and so much more.
Financial wealth is the foundation on which so many of your other goals, priorities, and aspirations are built. It’s not just the bottom line on your balance sheets that matters – it’s what that wealth enables you to do.
That’s why we have created and prioritized such a holistic, comprehensive view of wealth. Whether it’s your relational, experiential, or legacy wealth in question, you need to get your financial wealth in order to enable everything else you want to do.