Lessons Learned

I have just passed my 15th year of being in the financial advisory business.

God has been gracious to teach me some things along the way.

I want to share some lessons learned that relate to personal finance. These are lessons that we should all revisit often.

Like all wisdom in life, we need to have these concepts pounded into our minds and hearts on a regular basis. Our natural inclinations are to do foolish things with the resources that God has entrusted to us.

Proverbs 14:12, "There is a way that seems right to a man, but its end is the way to death."

Here are five lessons that I have learned along the way that if followed will help you become a better steward of financial resources.

1. Wealth is most often accumulated through hard work, patience and discipline.

Proverbs 21:5, "The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty." I have read that 50% of Americans believe that winning the lottery or suing somebody are the two top methods of obtaining wealth.

In 15 years of being a financial advisor, I have had a few clients who have experienced a financial windfall through a large inheritance or lawsuit. I have never had a lottery winner as a client. But I wouldn't expect the results to be any different. The vast majority of sudden wealth is depleted within 10 years. The amount doesn't matter.

The habits that are required to obtain wealth are the same habits that are required to maintain wealth. They include:

• Spend less than you make
• Work harder than the average person
• Save on a regular basis
• Be a patient investor- sticking to a plan despite current economic climates

One example of many is a client that I have had for 14 years. She was a school teacher who never made more than $35k per year. But she was frugal, a hard worker and a saver. And she has over $1 million invested with me. Less than 15% of that money came from inheritance. The rest is from personal savings and compound interest over the years.

2. Invest like an institution to enjoy better results over time.

There are three reasons why institutions generally perform better than individuals over time:

• Follow an investment policy (philosophy) with discipline
• Avoid emotional extremes
• Properly diversify to reduce large losses

A recently released study by Dalbar showed that institutions averaged 10% per year from 1997-2006 and individual investors averaged 6% per year during that same time frame. On an investment of $100,000 the difference is having $259,000 at the end of 10 years or having $179,000.

Most institutions follow a strategy that includes assets such as: stocks, bonds, real estate, absolute return, commodities and currency investments. They spread the risk and don't allocate a huge percentage to any one area. Each of these assets has its advantages/disadvantages. But a properly diversified portfolio can help an investor manage inflation and principal risk.

3. A simplified, organized life leads to less stress and greater effectiveness.

I was talking with one of my clients last week who had made the decisison to downscale housing by purchasing a house that was 1/2 the cost, 1/3 of the yard and less square feet. I asked her if she ever regretted that decision? Her answer, "It was the best decision I made. I have much less stress and things to worry about."

That has been my common experience in talking with clients over 15 years. Simplicity is the better path. Ecclessiastes 7:29, "God has made us simple, but we seek out our own complexities."

Speaking from personal experience, organization is key. I went through a random line-by-line audit of my tax return in 2006. I considered myself fairly organized before the audit, but there is nothing like a full line-by-line audit to expose the weaknesses in your organizational plan.

The audit turned out fine. But I spent probably 40-50 hours preparing and locating documents that were needed for the audit. Since that experience, I have started some new organizational processes. In addition to being ready for an another audit if it ever occurs, I have seen some fruit from these efforts.

For example, I update a mileage log daily. By measuring this regularly, I have noticed that my business mileage has decreased some. I start to question the wisdom of making trips that I wouldn't have questioned in the past. Some of this probably has to do with higher gas prices. But I am convinced the biggest factor is better organization.

The more important things you measure, the greater your success will be with those important things. I believe the key is to determine what is important to measure and focus on and to get rid of everything in your life that is unimportant.

Henry David Thoreau's quote has always stuck with me, "Most people live lives of quiet desperation, but I have chosen to live deliberately." Better organization leads to greater awareness. Greater awareness leads to better decisions. Better decisions leads to less stress and greater effectiveness.

4. Work until your mind and/or body quit working.

Very few people can afford to fully "retire" from paid work in their 50's or 60's. If you can't live on a 4% income stream from your accumulated assets, you probably can't afford to quit working.

I am convinced that biblical wisdom encourages leading a productive, others focused life until we die. Jesus said, "We must work the works of Him who sent Me while it is day; night is coming when no one can work"- John 9:4.

If you are in a strong financial position to make working for pay optional, you should still consider how to use your time and resources to positively affect others. If you are worried about not saving enough for "retirement", you should consider working for pay at something you enjoy and not trying to place high assumptions on your financial assets to perform above expectations.

I read this week that 27% of Americans believe that they can pull 10% per year from their retirement assets (Investment News, USA Today). You would have to be fully invested in growth assets and have a raging bull market for the next 30 years to make that doable which is likely pure fantasy.

My experience is that the people with the highest expectations are the most likely to pull out in panic when we have a bad stretch. So keep your expectations low and work as long as you can. Several studies on happiness have shown that one of the keys to happiness is low expectations.

5. Reduce or eliminate debt and build up cash reserves

When things are going well for you economically, there will be a temptation to buy things- a boat, vacation home, art, etc... But wise people make sure the basics are taken care of before purchasing luxuries. Two of those basics are:

Eliminating all debt. Romans 13:8, "Let no debt remain outstanding except the debt to love one another." You can make some financial arguments for certain debt- low interest mortgage; education; investment/business loans. But debt can lead to unexpected disasters as we have seen with the credit crisis on Wall Street this past year. You are better to strive towards a debt-free lifestyle.

Building up cash reserves. There are plenty of online banks competing for your cash with attractive FDIC-insured yields. You should strive to keep at least a year's worth of expenses in a cash account. Not only does this provide help in times of unexpected financial emergencies for your family. But it also puts you in a position to help others in need.

Obviously, you can take this to an extreme where you hoard money. Our trust should never be in our net worth. It should always be in the God who controls the future. But saving for disaster is a biblically wise goal. One example of many in the Bible is Joseph feeling led to store 20% of the grain for seven years of abundance in preparation for a great famine that was coming.

Hopefully, you have been reminded of some important ideas to concentrate on if you are reading this. I heard a sermon last week where the preacher said, "We never, never, never, never, never, never, never, ever outgrow our need to hear the gospel preached to us over and over." Our hearts are prone to wander. Likewise, we never outgrow our need to be reminded of financial wisdom.

It is probably my greatest motivation for keeping this blog. To remind myself of what I know in my heart to be true, but occasionally lose sight of.

For His Glory,

Ashley Hodge