Liquidity, Lifestyle, Legacy

When significant amounts of wealth are at stake, financial planning becomes even more important.

It can, among other things, give you peace of mind whilst also helping you to avoid leaving your estate – and how it passes down to loved ones – unnecessarily exposed.

In this blog, I'd like to talk to you about a simple mental model called the three Ls: liquidity, lifestyle, and legacy.

When considering how to spend income in the ways that are most meaningful to you, concentrating on these three "buckets" can help you think more clearly. particularly when short-term conditions could be uncertain.

Before we get started, it's important to emphasise that this informal philosophy does not have a one-size-fits-all approach. One person may love the concept of leaving a significant legacy behind, while another person may prefer the chance to spender every last penny they own! The idea is that there are several methods to allocated money across the three buckets - as well as within each bucket - depending on personal preferences.

Planning your financial future often entails incredibly personal decision-making, but oftentimes a simple framework can be helpful, especially in the beginning.

Liquidity

How much money is enough? At first glance, it can seem like an impossible question, but it will serve as a solid foundation for discussion about your future planning.

How much extra money would you ideally want to save up in an "emergency fund" if you had to consider your fixed expenses, such as a mortgage or school fees? Some people like the reassurance of having money on hand in case for a rainy day, as well as having cash reserves in case an investing opportunity arises. In either case, you need to determine a rough limit above which you believe any cash can be considered "extra."

Take a step back and try to understand the wider picture: while cash in the bank may offer a sense security and comfort, it is not without its own risks. We might be living in a low inflationary environment now, but what if the monetary measures the Government used to cater for the Covid-19 pandemic mean inflation starts exceeding interest rates? Simply put, the cost of living keeps cash hoarders in the slow lane.

But if you don't want to hoard cash, what are your options? Investigate investing if you're searching for long-term growth and asset preservation. It obviously has higher volatility than keeping money in a bank account, but the choice does not need to be binary. You can set aside some money for savings and invest some too. Making sure you choose the appropriate structure for these assets is also crucial since diversification of tax risk, particularly in the constantly shifting tax environment of today, is a crucial topic.

Finding a balance between your needs and goals is what it all comes down to.

A tip for business owners in particular: if you sell your company, you usually need to set aside a portion of the proceeds to pay the tax bill and other spending that is planned. To prevent being caught short, it makes sense to take this into account at the outset of any exit strategy.

Lifestyle

Life is short, as they say, and many people desire to find a balance between prudent financial planning for the future and and living in the now with a great lifestyle.

Mapping out early where you think your lifestyle priorities could lie could be a valuable exercise, whether you have frequent and exotic travel in mind or wish to pay for private school fees for your children.

By the way, I am not arguing that one should never make an impulsive purchase; rather, I am are stating that a little bit of planning ahead can go a long way. And we all can understand that most people cannot live on impulsive spending for the rest of their lives.

This is particularly true considering that the majority of us are living longer than ever, which implies that our retirement nest egg must last longer.

Simple things to ask yourself include: What do I enjoy spending money on? And will my expenditure change or stay the same as I age? It is usually simpler to picture your ideal lifestyle - and the means of supporting it - once start thinking about these things.

It’s not just your own lifestyle that’s worth thinking about. If you’ve got dependents, there’s value in having a so-called ‘Plan B’ in the event a worst-case scenario plays out.

Legacy

We all must, regrettably, pass away at some point, and for some people, the opportunity to leave a legacy is one they actively prefer to plan for.

The motivation for doing this is deeply personal. As an example, you might be keen to ensure that your surviving family can maintain the lifestyle you've worked so hard to achieve, help someone else in the early years of their career, or be the benefactor of a particular cause close to your heart.

Motivations aside, the practicalities of posthumous donation are complex and varied. Additionally, there are some significant ramifications from an estate planning standpoint that are important to be aware of.

In the UK, charitable bequests made through a will may help lower the estate's inheritance tax rate. However, before you reach that point, you might be considering giving while you are still living. The seven-year window that people now enjoy before a gift is excluded from inheritance tax will normally be taken into account at that point.

The important idea with legacy goals is that, when there is structure and clarity behind them, these good intentions are more effectively carried through.

The Bottom Line

Not everyone will want to leave a legacy, as I alluded to at at the beginning of the blog, and it's possible that you would prefer to align your wealth only against the two lifestyle and liquidity buckets.

Because each person is unique, their financial planning must take that their personal preferences.

I hope the concept of these three buckets serve as at least a loose framework for matching your financial situation to your individual goals.

Amyr Rocha Lima, CFP® is a financial planner who specialises in working with successful professionals age 50+ to help them reduce taxes, invest smarter and retire on their terms.

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