As a teenager, my father would tell me stories about how my grandparents went from riches, to rags, and riches again… many times over. My Grandfather Harold passed away a successful entrepreneur, but his road to success was paved with many financial challenges. At the height of his success, he built a mansion in Beverly Hills, only to have to sell it less than 1 year later, when he lost much of his fortune.
I write this story, not to dredge up the trauma that my grandparents faced back then, but to emphasize the importance of taking action and adjusting one’s lifestyle when faced with a prolonged financial change in one’s life.
When my grandfather lost much of his wealth and realized that his loss was not a temporary situation, instead of ignoring his new financial reality, he and my grandmother made immediate changes to their lifestyle to stem further losses. They sold their brand new house, moved to much smaller, more humble home, and made drastic cuts to their spending level.
But while this may have been an extremely difficult choice, their rapid response to their deteriorated financial situation allowed them to preserve the wealth that still remained and helped them to eventually re-build their savings.
A Real Life Example
As a financial advisor practicing in Los Angeles, I advise many clients on wealth building strategies. But all of the investing and financial planning advice is useless if an individual is in denial of his or her financial problems and unwilling to confront a change in that reality.
This week I was reminded of the virtues of my grandparents’ decisive action as I coached a long-time client through a difficult personal financial period. Her income had been seriously decreasing for nearly five years because her industry was in secular decline. For many years I had advised her to sell her luxury home (with a $7,000 monthly mortgage) and use the equity in the home to pay off expensive credit card debt. I reminded her of the necessity to reduce her spending and cut out her exorbitant restaurant bills until her income stabilized. But unfortunately, none of these changes ever occurred. My client was intent on keeping her house no matter the cost and continued spending in the manner in which she was accustomed. This past week culminated in what I would call her financial ruin. She had spent down most of her liquid assets, even taking the drastic measure to withdraw all funds from her retirement account before retirement eligibility age – 10% penalty and all.
Make A Change Before It’s Too Late
Many people in their lives will encounter a stressful financial period such as losing a job, or having a business in decline. But the key to coming out on the other end solvent is foreseeing when the problem may be prolonged and then taking action. That might force someone to make the painful decision to sell a beloved home, sell expensive artwork, or re-train to a different profession.
Part of the difficulty in convincing my client to make the necessary adjustments to her lifestyle was her consistently positive attitude that her “situation would improve soon.” Each day, she hoped that her finances would turn around. For anyone going through financial problems, this mentality is certain to help keep one’s spirits up and prevent a downward emotional spiral. But when it comes to keeping and building wealth, it is crucial that one is not blinded by optimism. Most importantly, confronting financial problems head on and making the necessary lifestyle adjustments gives one a chance at making a come-back some day and leaving a legacy that grandchildren may even talk about.
Mrs. Bourkoff graduated from Columbia University cum laude. In addition to her work as a financial advisor, Mrs. Bourkoff volunteers her time with the SIFMA Foundation dedicated to investment education for children. Lindsay can be reached at firstname.lastname@example.org.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your financial advisor prior to investing.