Creating Financial Staying Power

One of the most difficult disciplines to build is financial staying power and yes, it is a discipline. Staying power is the ability to maintain a certain level of performance in the midst of the stress and pressure of life. Some call it stamina, others call it endurance, but there are subtle differences between these that can cause you to miss the mark when trying to achieve your financial goals.

Stamina refers to your ability to sustain effort, period. Stamina has little to do with negative or stressful situations. It is all about your effort and the ability to sustain your effort when there is little or no real reason to suspend such behaviors. For example, if one has the stamina to save money that means he or she can sustain the effort of saving as long as there are no impulses to spend. Someone who does not have financial stamina would spend the money instead of save it.

Endurance refers to the ability to bear up under an unpleasant or difficult process or situation. Whereas stamina is more about your ability to maintain a set behavior, endurance is more about your ability to maintain a set behavior in the face of pressure to do otherwise. For example, if one has the stamina to save, he or she can sustain the effort of saving as before. However, when there is a requirement to spend (not an impulse, but a requirement), he or she will have the endurance to continue to save and find the resources necessary to meet that requirement elsewhere.  

Staying power is different than stamina and endurance because it is not about your effort or the circumstances. It is about how you have positioned yourself so that you can maintain an activity or commitment despite an unpleasant or difficult situation. In 2007, my wife and I began developing financial strategies to change our financial picture. In 2008 I was laid off. Using this layoff as a springboard, we solidified our strategies and moved on.

Because of our staying power, I was able to accept employment (at a 33% reduction in pay), yet never miss one of our financial goals. In 2015 I experienced a second layoff. Since we spent the last seven years positioning ourselves to withstand financial headwinds, we just kept on executing our strategy without blinking an eye. After two months, I was hired by another company (this time at only an 8% reduction in pay), and again, we never interrupted our financial strategy because of the staying power we had developed.

Why? Because beyond stamina to keep focused on our strategies and beyond the endurance required to ride out the negative financial events, we were positioned to continue to take advantage of financial opportunities. Even now, I continue to position myself to take advantage of financial opportunities to continue building wealth. Stamina says “I can do this for a long time as long as things remain easy.” Endurance says “I can do this for a long time in spite of some things becoming difficult.” Staying power says “I can do this for a long time in spite of some things becoming difficult and regardless of how weary I get because my strategies continue to position me to achieve my ultimate goal.” 

Because of these experiences, I wrote Simple Wealth Building Strategies as a way of sharing our experiences and strategies to help others navigate the turbulent waters of the new economic oceans. 

Creating financial staying power is not easy, but it can be done, even on an average income. This list briefly highlights five ways you can build financial staying power.

Five ways to create financial staying power.

1 Expect the unexpected and be ready for it. In my book, Simple Wealth Building Strategies, I outline my recommendation to have a tier-three emergency fund. Most every financial planner believes in having an emergency fund of at least three to six months worth of expenses. However, in today’s economy, a traumatic financial event can last far beyond that. This is why I recommend a tier-three emergency fund equivalent to one year’s gross salary.

2 Protect your credit like it was your daughter. I am not trying to offend anyone here, but men will know exactly what I mean. Like it or not, fathers are far more protective over their daughters than they are over their sons. It is part of the fathers DNA. Just like a father would put up barriers to protect his daughter from unsuitable young men, you need to protect your credit from unscrupulous individuals. In chapter 4 of Simple Wealth Building Strategies I give you the best way to put up a hedge of protection around your credit so you are not vulnerable to the thieves that seek to separate you from your resources. It might surprise you, but the best way to do this is not a credit monitoring service.

3 Document, document, and document. Every major financial goal needs to be monitored. How else will you know you are making progress without a scorecard documenting the results? Chapter three of Simple Wealth Building Strategies provides an in depth lesson on tracking your progress. This aspect of financial staying power helps you know when a shift in strategy is advantageous. Without documentation, you are blindly shooting at a moving target. You might hit the target occasionally, but it would just be dumb luck and unsustainable in the long run.

4 Use momentum like bacteria. When scientists want to experiment with bacteria, they put it in a petri dish to encourage its growth. Well, building wealth needs to be cultivated in the same way. You need to place your money in the petri dish of the market and take advantage of compounding returns. However, you have to know that building momentum takes time. Once you have built a substantial amount of momentum, the impact of an unpleasant or difficult process or situation is reduced. Staying power increases as the impact of negative financial events is decreased. That is the purpose of my book. I provide you with eleven strategies that, when worked together, will produce staying power. Collectively, the strategies I discuss in Simple Wealth Building Strategies work together to build, not just wealth, but also financial staying power. In other words, they build momentum.

5 Don’t overthink the obvious. Keep this phrase in mind whenever you feel the urge to over-complicate your financial strategies. If the plain sense, makes sense, seek no other sense. So many people lose staying power because they believe that wealth building is a sophisticated or complicated process. It isn’t. There are ways to keep it simple. If you do not understand something, stay away from it. There are so many ways for the do-it-yourself investor to build wealth with a small amount of common knowledge. Don’t compare your strategies with those of others. That will cause you to overthink what you are doing. Stay committed to your strategy so long as it is meeting your goals and expectations.

When you recognize that something is unsustainable, be willing to back off. I once talked to a young man who had a goal to fund his 401k to the maximum allowed by IRS standards. His strategy was to commit a large portion of his income towards his 401k and use credit to provide for his needs. He rationalized that in the long run, it would be better for him. Great goal, poor strategy. Eventually he would have to pay off that debt but he wouldn’t be able to use the money in his 401k and he didn’t have any income left to meet his commitments. He would be light years ahead if he funded his 401k with any income above his obligations and necessities. Instead he was digging a hole from which it would take him longer to get out.

Financial staying power is 10 percent income and 90 percent common sense. Having the right strategy, based on your individual circumstances, will go a long way in allowing you to position yourself so that you can maintain an activity or commitment despite the fatigue that can set in because of an unpleasant or difficult process or situation. If you have a personal finance question that you would like to see answered in a future blog, send it to me by going to http://kenrupert.com and completing the contact form at the bottom of the page. Who knows, your question might help someone who is struggling with the same issue you are.

The Social Security Benefits Gap

The Congressional Budget Office estimates that the Social Security shortfall over the next 75 years will be equal to 0.6% of the Gross Domestic Product. Do you understand what that means? In the next 75 years it will take 100.6% of the GDP to pay for the benefits of Social Security. That is why I call this socialist program Social Insecurity. Recently, while participating in a conference call discussing the options available for closing the gap, four basic ideas were mentioned.

Change the taxation of earnings. By increasing the payroll tax 1% today, 50% of the shortfall can be overcome. This would slow the pace at which the greatest Ponzi scheme ever played on the American people would eventually overtake the GDP, but it would not stop the eventuality of insolvency. Keep in mind that Social Security is based on the current workforce paying for the previous workforce’s retirement. I know many believe that the money they pay into the program is there for them when they retire, but the reality is that the money the current generation pays into the program is used to cover the expenses of the previous generations. Changing the taxation of earnings only adds to the burden of the current generation as it tries to raise the next generation charged with funding the Ponzi scheme.

Change the benefit formula. In other words, index the benefits to changes in longevity. The biggest problem with this idea is that quantity does not always translate to quality. As a population increases in longevity, the benefits provided are increased. The question that needs to be asked is “When longevity decreases, will the index adjust down as easily as it adjusts up?” This idea rewards seniority by providing more benefits as longevity increases. Control the determination of longevity and you control the distribution of benefits. See the problem with this idea? Changing the benefit formula in relationship to longevity is thought to be able to eliminate only 33% of the shortfall. Who knows if quantity translates into quality?

Raise the full retirement age. Different from changing the benefit formula, this idea indexes the full retirement age to changes in longevity. Instead of graduating benefits, the age at which a person can take full benefits is graduated with changes in longevity. As the population lives longer, the government will decide when you can retire and receive the benefits you believe you are “contributing” to. Here again, the concern is if the population longevity decreases, will the government quickly reduce the age at which a retiree can receive full benefits? The answer is no. This idea will result in the Full Retirement Age (FRA) increasing quickly as the longevity of the population numbers are manipulated upwards and will never, or nearly never, be lowered if the longevity measurement decreases. Only a 33% impact on the overall shortfall is expected with this idea.

Reduce the Cost-of-Living Adjustments. The idea is to determine the real inflation rate by using the shift in consumer’s decisions as prices in markets increase. This idea is a little convoluted, but basically it means that when the price of beef goes up, the consumer might buy more chicken. If the CPI is weighted on a fixed basket of products, it will not take into account that the consumer is not buying beef. Therefore, the CPI is overstated. But shifting the COLA to the more accurate Chain-Weighted CPI, the COLA would reflect the more fluctuating inflation rate and not the more stagnate fixed-weighted CPI. Doing this reduces the COLA adjustments realized by retirees, but is thought to only affect about a third of the shortfall.

These four ideas can all be considered stop-gap measures. None solve the problem and no combination will solve the problem without causing additional problems. With the advent of the Unaffordable Care Act of 2010, the amount of financial resources available for socialist programs will eventually dry up leaving those who were promised a pie-in-the-sky utopia without both the means to afford such programs and receipt of the promised benefits.

One simple idea that could solve 100% of the problem. It was briefly mentioned, but never discussed. Eliminate the taxable maximum. Remove the cap on income where Social Security taxes cease to be extracted from one’s income. For 2016, the maximum amount of taxable earnings is $118,500. If you earn more than that, you are released from the obligation to pay Social Security taxes. However, if you removed that artificial cap that protects the wealthy income earners, the problem would be solved.

Another idea that would solve the problem is to transition from a government controlled system to a privatized system where the tax still exists, but the lock box would be controlled by the individual citizen. The individual would have the ability to direct his or her Social Security tax in an account that only becomes available when the individual reaches 62.

Politicians will rarely consider real solutions for several reasons. First, they have an allergic reaction to losing the control over other people’s money and the people themselves. If they were to privatize the system, they would lose their political slush-fund. Anyone who believes that the money he or she is forced to contribute is sitting there waiting for him or her to reach FRA is kidding him or herself. Money being paid in today is used to pay benefits today. It is the future earnings of future generations that will be relied upon to pay for your benefits.

Second, the changes required will not win them favor with the higher income voters. In other words, they worry about political optics. If they remove the cap on income exposed to the Social Security tax, those earning more than $118,500 would come unglued. Liberals talk all the time about the rich paying more, but no one will actually make the rich pay more by simply removing the Social Security taxable maximum. It is the easiest solution, but politically the optics would crush many borderline politicians. If you want to tax the rich more to help those who do not have as much, simply remove all income caps that restrict higher income earners from not paying Social Security taxes on their whole income.

Third, they are not smart enough to figure out an exit strategy. I support a transition to privatized Social Security accounts. I have a strategy to accomplish this, but I doubt the politicians have the intelligence to fully comprehend the process. Politicians do not have the political will to actually take a private sector idea and allow it to work because, if they did, they would prove their own worthlessness.

The system is broken because it was designed on a faulty foundation. It was built on socialism. The problem with socialism is that eventually you run out of other people’s money. The best social program is the one that allows the individual to take responsibility for his or her own destiny. People need to learn that life does not respond to your desires as much as it responds to your decisions. Therefore a person’s destiny is directly linked to his or her decisions and not desires. When your decisions support your desires then and only then will you be successful.

Government programs cause dependency, not responsibility. The current system needs to be scraped, but in a way that make sense. I suggest a transition to a hybrid system where the percentage of the Social Security tax paid by the individual must be put in a tax-free investment account to be managed by the individual and the corporate portion is paid to the government. I also advocate for a buy-out plan where current workers can opt out of future Social Security benefits. The details are far too complicated to explain in a blog, but I will debate the merits of such a system if there are any political leaders who are interested in such a conversation.

Learn more about developing strategies that will provide a more secure retirement. I wrote Simple Wealth Building Strategies for you. Even if you have read all of the experts on finance, you will benefit by reading this book. It is finance from a different perspective. It is life from a different angle. It is a way to get and stay motivated beyond telling yourself that you SHOULD have a plan. This book gives you the information and motivation to do what you know you should do, but haven’t done.