My 6-year-old daughter, Victoria, recently erupted with jealousy over a friend’s dress shoes. Their play date melted down when she fled to our car in inconsolable shame.
(I can’t wait ‘til she realizes how uncool our minivan is.)
The next afternoon, she and I visited a popular shoe store.
A pair of sparkling Size 1 heels drew her immediate attention. I asked her to walk around the store to make sure they felt good. Mid-stroll, she returned to say the heels hurt her feet, “but just a little in the back.”
I urged her to walk around once more, so she could be absolutely certain that these shoes were not for her. Ultimately, we agreed that we have NO IDEA why people wear shoes that hurt their feet.
Glittering illusions
I hope Victoria’s short walk in 1-inch heels helps her to start asking smart questions about superficial appearances.
Even adults struggle with envy of others’ clothes, appearances, homes, and grown-up toys. It’s well documented, however, that open displays of wealth often amount to an illusion of financial well-being.
Just last month, Yahoo! Finance summarized some research into the vehicles of the high income and high net worth crowds. Favored rides include Hondas, Fords, and Toyotas.
The “millionaire next door” and “everyday millionaire” are real people who have lived within their means, often working in mundane careers and shopping sales.
“People that achieve … one to ten million dollars, the way they did it is, they didn’t do it for you,” Yahoo! quoted Dave Ramsey, an everyday millionaire champion, as saying on his mega-popular radio show. “They’re not mad at you, but they don’t care what you think.”
The everyday millionaires we see in our office may want a luxurious vacation or other high-end purchase, but they value financial security more and will only indulge when it is safe to do so.
Unfortunately, the persistent idea that wealth can be seen isn’t the only illusion that harms the average person. Here are three others.
The money pot
In last week’s article on safe withdrawal rates, John Berry touched on what I call the “money pot” illusion. This happens when a person misunderstands how long a large sum will last.
Here at Corner Post Financial Planning, we sometimes see the “money pot” illusion at play as retirement nears.
A quick example: A client or prospective client’s investment accounts total more money than they’ve ever seen at one time, let’s say $1.5 million saved over a 40-year career. While $1.5 million is a remarkable achievement for an average earner, a strong earner—say, used to a $200,000+ lifestyle—likely will have to cut their spending because they have under-saved. This can be a very rude shock!
Something similar can happen with life insurance. My husband and I fell into this when, as naïve youngsters, we bought our first term policies for $250,000 each.
It sounded like plenty at the time, but that figure in no way would have protected our loved one against years of lost earnings, medical bills, or much else unforeseen.
When facing a decision around a large sum of money, it often makes sense to consult with a professional about how to stretch those dollars.
What investors look like
Another harmful illusion occurs when people perceive that building wealth through investing is something others do. This is related to the “wealth glitters” illusion discussed earlier and is common among middle-class individuals who haven’t had wealth building modeled for them.
Sometimes a person with a company retirement plan will even tell me they are not an investor!
I opened my first retirement account at age 26, depositing a small sum each month into a Roth IRA. For many years that was the only retirement account in my name. Despite coming from modest means and making many mistakes, I was an investor.
We believe that everyone should aspire to be an investor, so our firm offers a way to serve individuals who do not invest with us by doing flat-fee financial planning services. I love this work, as we can assist someone in determining what track their financial life is on even if they haven’t started investing.
What an investment is
In this roundup of popular illusions, I’d be remiss if I didn’t mention a common delusion that surrounds investing.
Here it is: People are often wrong about what an investment actually is.
You have probably heard it said that “your home is the biggest investment you’ll ever make.”
Nails. On. Chalkboard.
Your home may be an asset, but it probably is not an investment.
In our world, an investment is something that makes you money. Most primary residences are expenses, even if you make enhancements that will one day increase the sales price.
For example, a few years ago we sold a house we’d owned for 13 years. Although we walked away with some cash, running the numbers on such expenses as adding a fence, bedroom, and French drain over the years shows that the home functioned more as a store of value than a legit investment.
There is no need to justify something you want or need to do for yourself or to your home by calling it a financial “investment.”
If you want a vacation property, swimming pool, new kitchen, or boat, just buy it! These can all bring you and your loved ones tons of joy.
In conclusion, it’s best to dispense with any financial illusions about what wealth, investors, and investing looks like. Appearances of success, comfort, and glamour are often just that.
Circling back to the shoe debacle, my daughter did select a more practical set of boots for “special occasions” like parties and church. Not having learned it all yet, though, the next day she chose a set of unicorn press-on nails from the school prize box. She proudly tapped them on every hard surface for hours, though later that evening she learned that it hurts when one gets stuck in your nose!
Beth Henary Watson is a Certified Financial PlannerTM professional with Corner Post Financial Planning.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through ICA Group Wealth Management LLC, a registered investment advisor. ICA Group Wealth Management LLC and Corner Post Financial Planning are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal. No strategy assures success or protects against loss.