A prospect called into the office the other day and asked me an important question I wished all prospects would ask: What do you specialize in? Now let me start by saying that most financial planners and advisers that I personally know are jacks of all trades. That’s not necessarily bad; however, the few who do specialize in one topic tend to stand out among the purveyors of financial advice. Having said that, for those who are curious enough to ask if I specialize, I answer with two words: financial minimalism.
Simplicity has been talked about for centuries. From the philosopher Lao-Tzu to the monk William of Ockham, there have been countless debates on simplicity being the answer to life’s challenges. Today, you can see the same concept permeating our culture, through art, design and as a lifestyle choice, under the umbrella of what’s called minimalism. It’s always been discussed, but rarely applied in everyday life. And rarer in the financial world.
I have a fee only planning practice in Los Angeles designed to promote financial minimalism. Surprisingly, I may be one of a handful practicing this philosophy as a niche. Perhaps there’s a misconception to the term ‘minimalism’ and more so when applied to personal finance. I don’t tell my clients to sell their homes, cars, and possessions and move to the country to live off the land (a la Henry David Thoreau). What I endeavor to show is the ease and feasibility of applying simple solutions to their personal financial conundrums. I provide a unique experience of looking at my client’s current situation from a different vantage point, simplifying the path to their goals, thereby freeing up more time and money to focus on the things that are important.
To give you an idea of how minimalism is applied to financial advice, here are the basic requirements to get the ball rolling. First step -delineate between “wants” and “needs.” As a financial minimalist in Orange County, whether you’re starting with limited funds or a mountain of cash, determine your budget by identifying your basic necessities as a starting point. In other words, what is the minimum amount of funds you will need to satisfy your fixed expenses. Once you’ve determined the minimum cash in-flow required to satisfy your expenses, move onto lining up your short-term/long-term assets and short-term/long-term debt, then apply the acronym: POP
Let me share a few examples…
The decision between wanting to purchase your first luxury vehicle by placing down say $25K or investing the money into your IRA can be a no brainer, right? You would be surprised how many have chosen to go down the path of satisfying their ‘wants’ today instead of satisfying their ‘needs’ for tomorrow. If you can start to practice viewing things with a bigger scope that extends from the present day to 30 years into the future, you will start to shift the way you think by asking if purchasing a $60K sports car can bring you happiness beyond 3-4 years compared to a retirement account with a potential balance north of $700K (thanks to the power of compounding) in 30 years.
Must admit this is a category that I’m still working on myself. This stage has you looking at everything from cash-flow to debt to assets and placing each item into your income statement and balance sheet. So what can you get out of this activity? You will start to identify duplications. Once you see everything on one sheet, you will notice multiple accounts: credit cards, checking accounts, investment accounts, real estate, etc. No matter how you slice it, there is little to no advantages of having duplications. From having two identical mutual funds in two separate portfolios to owning two checking accounts at two different banks, ask yourself why you would need to have two of the same thing. Did the broker or the banker talk you into it?
Periodically review the first two steps from top to bottom to see what needs to be jettisoned. Chances are, you’ll find something that is under-utilized or duplicated. Purging creates more physical/virtual/mental space and cuts time/expenses/effort. The cathartic euphoria that you will feel by eliminating things not needed can be life changing. Imagine the weight being removed off your shoulders by consolidating your multiple credit cards, selling your unaffordable sports car, or trading your high cost mutual funds.
For the P.O.P. process to work and work consistently, it helps to understand the secret sauce. It is not something you can see, touch, or smell. It is the power of perception. If you can change the way you perceive things, you can change the way you do things. Ask yourself what can I do to make life simple or the very least…simpler. Better yet, use mental pictures to help you work towards living in the state of minimalism, or in other words, simplicity. One mental exercise would be to put yourself in the shoes (or the bare-feet) of early homo-sapiens running from a saber tooth tiger, if you had to pick two items to take with you (mind you, you only have two hands), what would you grab and go?