There are only three things you can do with money

1. Spend it (a cash flow system)
2. Save it (protected money)
3. Invest it (potential money)

The majority of effort in our society is placed on investing.  But is this the best strategy? Let’s look at how the financial planning industry represents their returns.

The common mantra is to put your money into the stock market and leave it there. Why? Because it always comes back and the average for one hundred years is over seven percent, or so the saying goes.

In fact, the Dow Jones Industrial Average (DJIA) for the past 100 years is 7.26%.

Let’s see if that fairly represents the situation. If you were to put $1,000 into the DJIA in 1909 what would it look like in 2008, 100 years later?

You can check this with online calculators or your own financial calculator. Take $1,000 as your present value (PV), 7.26% as your interest rate (INT), 100 years as your term, and solve for future value (FV) compounded annually.

The value of your account in 2008 is $1,106,061. (If you got $1,391,484 you compounded monthly.)

However, had you actually invested $1,000 in the DOW in 1909, your account balance would be $142,954. What happened? That’s $963,107 less than it should be. Let me illustrate:

Let’s say you invest $10,000 with Sue, your Financial Advisor and she earns your account a 10 percent return. You made $1,000 and your new balance is $11,000. Easy math.

Year two your account drops 10 percent. How much did you lose? If you said $1,100 you’re right and your new balance is $9,900. That’s $100 less than you started. So what is Sue’s average rate of return for your account?

Year 1 = 10%                        Year 2 = (10%)            Average = 0%

How do you feel about those numbers? Is the average an accurate representation of what happened to your account balance?

Something seems out of whack here and that’s because your ending balance is lower than your beginning balance. Yet she represents your average rate of return as 0 percent, when it is actually less than 0 percent.

You see there is a difference between average rate of return and actual or compound rate of return. The DJIAs actual rate of return for the past 100 years is 5.09%.

Assuming a 15 percent tax bracket, your actual return is 4.61 percent. Since nobody works for free, let’s add in a 1.5 percent management fee (much less than average) and the DJIAs rate of return is 3.51 percent.

In other words, if you could have put your money into an account that averaged 3.51 percent or higher and was tax favored, you would have out produced the DJIA since 1909.

1. Spend it
2. Save it
3. Invest it

The media overflows with investment advice and commentary. TV pundits, talk radio, and news specialist discuss almost exclusively the stock market, mutual funds, bonds, real estate, and to some extent hedge funds and other esoteric opportunities.

Our world of communication is filled to the brim with investment advice. So how is the primary focus on investing working? Are you feeling better about your finances today than you did 2 years ago? How about 10 years ago?

It’s doesn’t seem necessary to cite how much of a mess we are currently experiencing in our country. Bloomberg, Frontline, and Time have done special reports on the failure of the 401k concept and the exorbitant fees charges by management firms and mutual funds.

Overwhelming evidence proves the failure of the for-profit-mutual-fund industry says David F. Swenson in his book Unconventional Success.

None of this should be alarming or new. The data have been around for years, yet why do we as working folks continue to put our money at risk at the expense of basic financial principles each of us claim to know.

Let’s review the meaning of spend, save and invest.

Spend: Having a Spending Plan. Knowing where each dollar is going. The rule of thumb is to give each dollar a rule or the dollar will rule you. A Spending Plan puts the focus on cash flow.

Save:      Protected money. Zero to little risk. Checking, savings, cds, money market, life insurance, annuities (not variable), mattress (assuming your children don’t find it).

Invest:   Potential money. The potential exists for gain as well as loss. Stocks, bonds, real estate, mutual funds, variable anything, hedge funds, a member in your church who has a great tip, Las Vegas, lending it to a relative.

The Financial Planning industry has been around for decades. They specialize in investing. I recently read a short article found in Discover magazine that cited research conducted on the clients of Financial Planners.

The research found that when a Financial Planner tells a client what to do, the client’s capacity to make financial decisions becomes paralyzed. The difference between a Planner and a Coach is that a Planner tells the client what to do. A Financial Coach teaches the client not only how to make good decisions but how to accomplish what the client wants.

My take: Anytime thinking human beings abdicate responsibility for wealth and happiness to another, they get what they deserve. Very little to no effort is invested into the wealth and happiness today and therefore very little by way of return will result.

We cannot afford to continue down the path on the pursuit of prosperity focusing on the symptoms to our problems. Investing is not the solution. Putting together a sound Spending Plan and learning how to save your money will outperform investing and is the path to peace of mind and financial stability.