Dynamic Principles for a Good Year
LFG Marketing | July 2019
An April 17, 2019, commentary in the Wall Street Journal featured a 2015 study from sociologists at Cornell and Washington University in St. Louis that sifted 44 years of income data for the US population. Among its findings:
- 12 percent of the U.S. population will have at least one year where their income places them in the top 1% of all households.
- 39 percent will have at least one year of income in the top 5%.
- 56 percent will have at least one year of income in the top 10%.
- 73 percent will have at least one year of income in the top 20%.
Economists often use the top 20 percent as a demarcation for the upper middle class. These findings suggest that three-fourths of American households will, for at least one year during their working lifetimes, be members of the upper middle class. Which sort of supports the idea of income mobility, that “moving up” is possible.
But wait, there’s more…
Only 0.6 percent will stay in the top 1% for 10 consecutive years. This counterpoint leads to a very profound statement about personal finance:
Income mobility isn’t a one-way elevator. Not only do Americans move up, they also move down. But how many of us make financial plans with this reality in mind, especially when our elevator is going up?
The Necessity of Dynamic Principles
In any planning process, we often assume static conditions for some variables. In personal finance, we might project that our health, income, living arrangements and other factors will remain the same, or progress in a consistent manner.
Deep down, we know these variables will change. But in pretending these factors are static, we can be seduced by an illusion of stability, that our static assumptions about life are a reality. This is especially true in periods of relative affluence when our income is stable or steadily increasing.
In these moments, there is a natural tendency to adjust to our good fortune, even though it may be fleeting, by upgrading our lifestyle. We get a nicer car, take a longer vacation, buy a bigger house. And why shouldn’t we? If we’ve met our pre-determined (and static) saving objectives, doesn’t that mean we can enjoy the extra?
Maybe not. Remember the reality: Americans will experience both periods of economic insecurity and relative affluence. When outcomes vary from the plan – for better or worse – there should be some adjustments.
Dynamic Responses to a Good Year
Considering the possibility of economic insecurity during a good year might be perceived as buzzkill; just when things are going great, someone reminds you it might rain on your parade.
If you see it that way, it may be because the static projections you used as a baseline have become your reality. But your financial life is not static, and never will be. If you’re having a good year, here are a few dynamic principles you might consider.
Over-save. Suppose your static personal accumulation plan assumes saving 15% of income each year. If income exceeds expectations, it might be better to save 20, 25, 30% – or more. Because if your income takes a hit in the future, one of the first casualties might be the ability to save. Over-saving in good years limits the financial damage from bad ones.
Secure your good fortune. If you over-save, you don’t have to take as much risk. Ten thousand dollars earning 1% per year is more than $5,000 earning 5%, and it will take 17 years for $5,000 to grow large enough to surpass it. A good year is a great opportunity to make your savings more secure.
Enjoy it. (But pay cash.) Some delayed gratification is necessary. But too much delayed gratification, especially in a good year, can be de-motivating. How can you balance the prudence of over-saving with the pleasure of spending?
Here’s an idea: If you’re willing to pay cash, buy it. If you’re not, be cautious. Take the purchase of a new car. In a good year, $800 monthly payments for the car you’ve always wanted might seem doable, even though it’s double your current $400/mo. But what about next year, or the year after, when things might not be so flush?
To answer that question, reframe the transaction. If the car costs $40,000, and you have the funds, are you willing to pay cash? If so, buy it. But if the large expenditure makes you uneasy because it makes too deep a dent in your long-term accumulations, maybe it’s better to hold off. Almost every luxury can be financed, but what you’re willing to pay cash to enjoy can be an effective psychological measuring stick for how much you can comfortably spend.
Lifetime Financial Growth, LLC is an Agency of The Guardian Life Insurance Company of America® (Guardian), New York, NY. Securities products and advisory services offered through Park Avenue Securities LLC (PAS), member FINRA, SIPC. OSJ: 244 Blvd of the Allies, Pittsburgh, PA 15222 (412) 391-6700. PAS is an indirect, wholly-owned subsidiary of Guardian. This firm is not an affiliate or subsidiary of PAS. 2019-82022 EXP 06/2021