12 – Funding Life Events


Episode Overview:

Ken shares how his family greatly impacted his desire to build his net worth and plan his financial future. Children are expensive and they all have life events that require money such as college or weddings. Plus there are events that Ken wanted to share with his wife as well. So how do you account for and manage all these expenses? Factoring in details such as how much is needed, how soon is it needed and how will the money grow overtime, Ken discusses building a dynamic model to help forecast and overcome these hurdles.

Transcriptions are auto-generated, please excuse grammar/spelling!

Happy Day to you. This is Ken Kaufman CFO and I am thrilled you’re here for Episode Number 12, funding life events. Here’s a quick story that helped me to create something that I’ve just never seen anywhere else organized in quite the same way. Well, maybe except for my brother. Because as I was developing mine, he was developing something on his own as well. And we shared some intel back and forth, until we started to figure this out. And his iterations, a little bit different than mine. But that’s because that works for him.

So my wife and I had our first child in 1999, our second child in 2001, third child 2004. And then in 2005, we had the fourth child, and then in 2007, the fifth 2009, the sixth, yep, it keeps going. In 2013, number seven, and then in 2015, Number eight, yep, eight kids in total. By the way, my brother has seven. So we’ve been on this parallel journey. This is why we collaborated together.

I love my kids dearly. But Wow, kids are expensive. And as we added each child, and my brother felt the same thing. I felt this mounting pressure to think, to try to figure out how in the world was I going to afford to help them financially with any of their major life events? Think about college marriages, all those sorts of things. Another way to phrase it, is there any way that I could build some net worth that would allow my wife and I to help them, as well as the fact that my wife and I have some key life events that we want to try to say for for ourselves as well.

The more I thought about it, the more I realized I could build a model, simple spreadsheet, if you will, that could solve for the following. How much money do I need to put into this life event fund, and that’s what I’ve called it at different intervals, to make sure that there will be enough in it when it might be needed for each of these anticipated life events. The more I thought about it, the more doable it felt.

But I had four hurdles. The first one was I needed to come up with some assumptions around dollar amounts and the timing of when these various life events would occur. The second thing is I need to come up with an assumption on how much the money that’s being saved for these life events would grow each year or what the investment return would be net of taxes, if they’re in taxable accounts. If they’re not in taxable accounts don’t need to worry about the taxes unless there’s consequence coming out when when you pull the money out. The third challenge that I had, or hurdle was then to build a model to capture all of these assumptions. Well, that’s not a big hurdle. I love doing that. I’m a spreadsheet nerd. And I love solving problems and complex puzzles, using spreadsheets. So that one feels awesome, but still need had to be done. It was a hurdle. And then the last hurdle of the four was to build a simple, easy to understand graph that would show the balance of the fund each year, and how it would change year over year. And I’ll I’ll get into some more detail about why that one’s so important and why that’s not just the icing on the cake, it ends up becoming the entire cake.

So let me break these down a little bit further. First of all timing on amount. And I’m sorry, assumptions about the amount and then the timing of these various life events. So I decided that I was not going to save as I went through this process, I realized I don’t want to save for college for my kids. Not that I don’t want them to go to college, I don’t want to encourage that. There’s just one other thing that I got a lot of value from when I was college age that helped me in so many areas of my life, and it was serving a mission for the Church of Jesus Christ of Latter Day Saints was a two year commitment. And I paid my own way. I decided in my wife decided that we wanted to save for this. And then if we ended up not needing the money because we had other money available or whatever to help them with this or preferably, if they earn the money themselves, then we could potentially take these funds and repurpose them and to help them with college or other sorts of things. And then the other thing we wanted to save for was marriages.

Because of missions and marriages being the main use of these life event funds, I steered away from your traditional college savings plans, not that those are bad, I just wanted a lot more flexibility than those traditionally would give. And so that meant that these would be invested in a taxable account, which meant I needed to net that out of the investment return that I was expecting any of the funds put into get. So I then estimated the cost as best as I could, how much does admission cost? How much do marriages cost. And then I had to figure out the timing on when these events would occur.

And also tell you this, my kids are fascinated with the part about when they get married, because I’ve built this life event fund out and the assumptions are in there of exactly when they get married and the dollar amount of that will be contributing to help with that process. And they just have great fun thinking about it, speculating about it, laughing about it. And I think I’d have to go and look, but I think our for soon to be four year olds marriage date puts him in like 2038 or 2040 years somewhere, you know, way down the road. Anyways, fun to think about kids have a great time with that. So that helps me with those assumptions.

The next thing I need to do is figure out okay, how much are these funds going to grow each year. And they need to be obviously net of taxes. Because I’m I’m using taxable accounts to do it. So I looked at the timeframe that I had before I needed to start pulling money out for this life event fund. I then consider my and my wife’s tolerances for risk, meaning, how comfortable would we be if this money that we’re putting in this life event fund were to go down by five, or 15, or 25, or even 50% in one year, and it took five or 10 years to recover the amount that was last I then based on this risk tolerance and how we would respond to a down market. And if that would hurt our ability to do what we’re trying to do versus gain some return. Over time, I then came up with a model portfolio. And this is something we’re going to talk about in future episodes about investment allocations, passive versus active investment strategies, all of those sorts of things. And I assumed an annual growth rate for the portfolio that’s based just solely on past performance, no way I can predict a project the future, nobody can. But just looking at past performance came up with a nice number to grow that investment by each year. And then that became the investment return. And of course, I subtracted the tax rate off of that, where are marginal tax rates at and because most likely, these will have a modest amount of interest and dividends that will be generated in this portfolio.

So the third hurdle is building a model to capture all these assumptions. While using Google Sheets, I created a tab in the Kaufman family fiscal plan workbook. Yeah, not a creative name. But what I can tell you is is that this workbook, over decades has become a very robust and powerful financial planning tool. And we rely on it heavily. And it’s where I go to to build new things or to evaluate or analyze new things. And it’s just something that keeps growing and keeps growing.

So I titled the tab Life Event Fund, I then built out the model with places for the main assumptions that if changed, it would flow all the way through the model radically. So for example, if I changed my assumption about, hey, I want to put $200 a month in instead of $100 a month into this fund, then it goes through an auto updates through the entire model. I organized all of this by month. So it shows the inflows of any contributions into the life event fund, as well as any withdraws that may need to happen from the life event fun or in essence, it shows these ins and outs. And no, I’m not talking about the hamburger fast food chain, the one that I grew up just a few miles away from and South care. In Southern California. I’m talking about just seeing the money come in the money come out.

I also show the assume growth rate each year, again, that have taxes. And what does all this get me to, it’s a tool, and it tells me how much money I’m going to need to put in every month to cover all these life events. Or it could be used the other way to solve for the other variable, which is based on what I’m willing to put in each month, how much can I afford for each of these life events that we’ve got planned out and assumed into the future besides the missions and the marriages, some of the things that my wife and I have as well. I like this, because it allows me to set expectations and get alignment.

So my kids can know that we want to contribute and help but there’s only so much and if we have more will be happy to try to share. But based on our model, and based on how things are looking, this is an expectation to set. And then if they want more, or they’re thinking about more than they know that they’ve got to come up with that difference. So it’s a powerful tool, it helps us understand the future, get alignment, set expectations. And it increases your net worth with this great set of purposes or causes in mind for each one of these life events that are coming.

My fourth hurdle. And this is the crux of it is building just a simple chart, a simple line graph that allows us to be able to see what’s actually happened in this model. Because the problem is, I’m a nerd at this stuff. I love building models and spreadsheets. But with hundreds and hundreds of rows and columns and data points all over. It’s not intellectually consumable or intellectually accessible. Meaning Can I sit down look at it and come to my conclusion and understand it within 10 or 15 or 20 seconds. Without this simple line graph, no way to accomplish that. So by building it in, it then shows me each year, what’s the balance of the life and based on what’s going into it and the investment returns minus any withdrawals for any life events that are happening, I make that zero dollar line on the chart very clear, sort of the line goes below it, I know there’s a problem. Either I need to contribute more or commit to paying less towards certain life events. Or if it’s above and below way above, perhaps I should consider contributing more towards some of those live events or reducing the monthly amount that I put in.

Again, it’s this nice, clean, easy way to just iterate and iterate toward understanding what changes I need to make. So that I can accomplish and do what I’m trying to with these life event funds. And I’m not hunting through rows and columns of data and breaking formulas and all those sorts of things. So I just want to remind you one thing. So anyways, those are the four hurdles, and how I took that on and tried to overcome them.

A model is just that it is something that you build at a smaller scale. And that’s less accurate than reality or what the actual thing is going to look like. I had to make a lot of assumptions here. Most likely wrong, but directionally I know they’re close enough that I’m giving myself a decent representation of what the future’s going to look like. Well, there it is. Funding life events with what I call the life event event fund. I know I know so original, but the sooner you make a plan for your and your children’s life events, the better chance you can contribute in a meaningful way to as many life events as possible. Make assumptions, build a model, then take it out for a spin and iterate until it fits the end result. Your net worth will start growing as you say with a purpose to fund these important life events.

It has been awesome to have you join today. Many many thanks to you for joining. This is a wrap for Episode 12 happy day.

Transcribed by https://otter.ai

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About the Podcast

Join Chief Financial Officer Ken Kaufman as he helps you track and hack your net worth. For those seeking financial independence, your net worth is one of the most significant measurements of success. Using his two decades of financial experience, Ken Kaufman helps you overcome your financial obstacles and look onward towards a better, brighter financial future.


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