Never Spend Money Before You Have It
Financial failure stalks wealthy families because most don’t have a wealth management process designed to protect their capital. This post describes a way of thinking that will protect your wealth and generate income from your investments to support your lifestyle.
Live Within Your Means
Early in my career on Bay Street I was introduced to a wealthy client whose billionaire father gave him $100 million dollars on his 18th birthday. In many ways, this ruined the son’s life, but taught me a valuable lesson about protecting wealth and income. The father gave his son one rule about managing his wealth: only spend your income, never spend your capital.
In other words, “Don’t kill the goose that lays the golden eggs”.
Since even a small rate of return on a large pot of cash is more than the son needed to support his extravagant lifestyle. He spent his millions each year on drugs, women, booze, dining, travel, gambling. etc. None of the spending made him happy, and he was also a terrible investor, but since he only spent his income and never encroached on his capital he found that is capital continued to grow. He would often invest in crazy things and gambled wildly, but he only did so with his income and he never spent his financial endowment.
An Income to Support Your Lifestyle
You will never go broke if you work with your family office and other advisors to make a basic budget of your expenses to determine how much income you require to support your lifestyle. If you make a basic financial plan and stick to it, your investment advisors can determine the level of income to generate from your portfolio that will support your lifestyle.
Accept Some Constraints
When we accept constraints on our spending from a budget based on the income we generate, our wealth becomes sustainable. When we make excuses to encroach on our capital for personal consumption like buying a new house or making a new investment in a start-up, we risk eroding our capital base. We also inadvertently increase the psychological burden of wealth in the process.
Never Sell Anything?
Taken to the extreme, I believe it may be prudent to plan on NEVER selling your successful investments. Consider a stock portfolio of blue-chip dividend paying companies. These holdings will generate dividends each year that can be used to make new investments over time. New investments, some riskier than blue chip stocks, should only be made with the cash from income. Consider creating a rule of only making new investments with the income generated from the current ones.
