Warren Buffett once said that when it comes to inheritances, the superrich should "leave the children enough so that they can do anything but not enough that they can do nothing." In the spirit of Buffett's quote, I find myself about to start what otherwise looks like an awesome job that will require me to suspend my work with The Motley Fool by the end of June, 2024.
Pausing those Fool roles will result in a substantial net pay cut. Yet while I haven't inherited anything worth more than sentimental value, I am in a spot where I can make it work despite that loss of income. These four principles, learned over the past two decades of contracting with The Motley Fool, are core to that anticipated success.
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1. The nine-word philosophy that makes it all possible
- Spend less than you earn.
- Invest the rest.
- Repeat.
Those nine words sit at the heart of virtually any successful personal financial plan. Up until this point, they've helped me pay off debt, save for retirement, and cover the expected college costs for my older two children.
With my two older kids' colleges now essentially covered and retirement on track unless inflation spirals out of control, there's less need to sock away as much new money in investments as there had been. It's much easier to cut back on investing than it is to cut back on core lifestyle costs. That makes it far less painful than it otherwise would have been to adapt to the lower income I'm expecting.
2. Invest for a purpose
Speaking of my kids' college educations, starting this fall, I will have two children in college at the same time. So yes, I'm setting myself up for a major reduction in income at the exact same time that I'm starting three exceptionally expensive years.
Yet because I've invested in 529 college savings plans for all four of my kids since they were born, the older two's undergraduate costs are largely covered. While that money was invested in stock funds for quite a long time, it now sits in CD ladders, with those CD maturity dates set to be around the time I need to withdraw the cash to pay the bills. (The younger two are still far enough away from college to where the plans for them are still invested for growth and need that growth to be successful.)
As a result, while I know the next three years will be insanely expensive, I also know that the money that I'll be paying for their educations will be there. That's a powerful tool to have on my side, making it much more feasible to deal with a lower income.
3. Money can be put to other uses
Of course, one of the biggest challenges when it comes to paying for college is the fact that it is virtually impossible to know what the price tag for it will be. Between schools having radically different price tags and scholarship offerings and late-breaking changes to both, it's exceptionally hard to know what you'll pay until it's too late to do anything about it.
Because of that uncertainty -- along with the uncertainty of what my kids' 529 accounts would be worth -- I built an investment-grade bond ladder to help cover additional costs if needed. With the older kids' 529s largely sufficient, I can use that bond ladder money to cover other costs if needed.
4. "Good enough" investing can still make money over time
Eleven and a half years ago -- on Dec. 4, 2012 -- I launched a real money portfolio with $30,000. I haven't added or subtracted a single dime since then, and as of the market close on June 4, 2024, that account is worth $144,217.83.
Had I instead invested that money into the SPDR S&P 500 ETF, an index exchange-traded fund (ETF) that tracks the S&P 500, and reinvested dividends along the way, it would be worth about $138,175.92. While I slightly outperformed the market over that 11.5 year period, I certainly can't claim to have trounced it. Indeed, there were significant stretches of time where that real-money portfolio trailed that key market benchmark.
That real-money portfolio was never designed to try to beat the market. Instead, it was designed to attempt to deliver a dividend income stream that grew at least as fast as inflation over time. It used the principles of dividend growth, balance sheet strength, valuation, and diversification as the key tools to pursue that goal.
Those aren't exactly the hallmarks of a rapid-growth, light-the-world-on-fire investing strategy. Instead, they provide a solid framework for a "good enough" strategy that I was (and still am) willing to follow, even when the overall market is not cooperating.
Over the course of 11.5 years, that "good enough" framework nearly quintupled my invested capital and ended up slightly outpacing the market. And now, should I actually have to tap the dividends from that account to make up for lowered income, my broker estimates that it could generate around $3,600 in dividend income over the next year. Dividend income is never guaranteed, of course, but it is nice to know that there will likely be some income from my investments along the way.
Get started now
Thanks to a combination of these four principles, I now find myself in the position where I am able to take what I hope will be an absolutely awesome job, even though it means a smaller net paycheck. Importantly, it also means that if that role does not work out as expected, I will still have the same flexibility to figure out a different path forward.
That flexibility comes from having a solid financial foundation. It doesn't take a Buffett-sized inheritance, a market-trouncing investment strategy, or any super-complicated financial engineering. It does take time and a willingness to apply those principles until you've built up enough of a buffer to where you can make it work.
Once you get there, though, the relief is palpable. So get started now, and let these principles help you get on track to where you too may have a chance to have the type of life that Warren Buffett hopes that the children of the superrich can live.
