Saturday, October 10, 2015

A Cautionary Tale

Let's start this off with a story about someone I'll just call John. John began working for a company in his early 20s and ended up staying with his same employer for over 30 years. During this time, John managed to work his way into a position that paid him very well. To give you an idea, his co-workers with similar tenure and title have averaged $200,000 per year or more for the past decade. John and his wife stayed in the same house in a working-class neighborhood even as his income increased to where some years' earnings would have exceeded the value of his home. While they didn't spend a lot on their home, they did spend a lot on other things, such as vacations.

Sadly, when John was in his mid-fifties, he suffered a stroke that left him unable to work. In an instant, he went from a comfortable income and lifestyle to unplanned early retirement. Although he had been earning a good income, he and his wife didn't have much to show for it in savings or investments. This didn't stop them from continuing to spend like they always had though. As their savings were depleted, an additional source of cash was discovered in the form of taking out a second mortgage.

As you can imagine, this story doesn't have a happy ending. John passed away recently, in his late 50s with next to nothing left to support his wife and family.

John happens to be the friend of a friend and this came to my attention when I saw a GoFundMe site set up for people to help donate funds to cover the cost of a funeral. John's widow was left without even enough money to cover the cost of a $7-10,000 funeral, where just a few years earlier he had been earning more than that each month. This is always sad to see, but even more so when I know that the financial outcome didn't have to be this way.

What can we learn from this story?
  1. Save money and plan for the future. I've heard people say "I'll start saving for retirement after (fill in the blank)". Except as soon as that event happens, something else urgent comes up that causes them to continue delaying. Saving needs to be a habit and be done intentionally.
  2. Have life insurance. Even a small amount would have helped in this situation. I currently carry life insurance worth ~6x my income and have a net worth of ~5x my income. If I were to die, my wife would be left with a net worth greater than 20x our current household expenses. We have a plan in place where if something were to happen to me, my wife would know what to do with the money and would not have to work again. John's widow has no plan.
  3. Repeat after me, "INCOME IS NOT THE SAME AS WEALTH". It isn't the amount of income you earn that determines your financial success, but rather the amount that you keep. I have met several millionaires who never earned an income near that of John's, yet John died with nothing to his name. Income is only here temporarily, whereas true wealth is here forever.

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