When clients, prospects, or passersby come to us and inquire about planning, we like to describe the basics of planning with the following analogy:
“Imagine you are at a wedding and the bride and groom have a tower of champagne glasses. To fill them up, they grab a bottle and proceed to pour champagne into the top glass. As the top glass fills and begins to overflow, the champagne trickles down into the other glasses, row by row, until the entire tower is full. This is what we attempt to do when it comes to your finances – fill up all your glasses (i.e. your financial goals) in a succinct manner.”
The overall concept of financial planning is truly simplistic. However, the ability to recognize and be deliberate about how you fill up those glasses is where it becomes quite complex.
The best place to start is to focus on the key ingredient – the champagne. The champagne represents an individual’s income, which is the only way to fill up all the glasses. No champagne means there is a tower of empty glasses. When attempting to fill one’s tower, it is logical to place the focus on the amount of champagne needed. However, in this analogy, the proverbial champagne could last for 30+ years. In that amount of time, most people experience changes in how fast and how strong their stream of income will flow. What becomes difficult is the lack of control one may have over the income stream they can produce. This lack of control can force individuals to seek out more bottles of champagne to ensure they can reach more of their goals.
This search for more champagne produces ideas of passive income such as real estate or a side-gig. The difficulty here is that more income is needed to produce more income. If we don’t have enough champagne, then we need to borrow champagne from a guest in order to fill up the glasses. The issue then becomes the lack of ownership over the guest’s champagne. If we fill our glasses with the borrowed champagne, then the guest who lent it to us can take it back, potentially shattering our beautiful champagne tower. The champagne is our crown jewel, but the lack of control can force people into making difficult decisions.
We feel it is best to look at our glasses first because technically there are no expectations or limits on how high the tower of goals may be. All of these goals, in turn, represent their expenses. It is a beautiful sight to watch the champagne slowly fill up all the glasses, but the overall goal is to eventually drink from those glasses to ensure everyone is on the dance floor having a good time. What’s interesting about the glasses relative to the champagne is that we have control of how many layers and glasses we want to fill up. With that said, at times it may feel like we don’t have control at all because our parents or loved ones feel like we should have a set number of layers because that’s what they did at their wedding. These societal pressures are real; however, as real as they may be, we still have more control of that decision then the amount of champagne we can buy or produce. Instead of worrying about the amount of champagne needed, it is more productive to figure out how many layers of glasses is realistic. For some, it may be one glass and for others, it can be as many as they may want. Shifting the mindset allows one to tackle the foundation of the problem – to figure out exactly what they want. For example, if someone wants more layers then they will need more champagne to fill their glasses. If they happen to be in a profession that has limited upside potential, then it may be time to switch careers where they can produce enough income to support their perceived tower. On the flip side, maybe someone doesn’t want as many layers as they thought and can reduce their champagne down to a point where they could switch careers, prioritize family over work and “downsize” their career. The point we’re making is this: income is, at times, uncontrollable, but the number of glasses can be controlled.
Knowing the number of glasses is an excellent first step in ensuring they are filled based on the amount of champagne we have. However, making sure those glasses are placed at the appropriate levels is how we maximize and achieve our goal of full champagne glasses at all levels. The top glass will always be a priority. In order to make sure all the other glasses get champagne, it has to be full or it won’t pour over to the glasses below. This top glass is our emergency fund. Having an emergency fund is always a necessity because it allows an individual to create a bank of income for unexpected events in life. It would be heartbreaking to have saved up for a fun vacation only to have the transmission go out, depleting all of those savings. The emergency fund keeps us prepared for that, acting as a safety net for the rest of the tower, ensuring it won’t crumble. Furthermore, we never want that glass to be bigger than it needs to be, which would unnecessarily delay the other goals. Being deliberate on how big the top glass is will affect the overall tower – it needs to be just right.
After the top glass has been calibrated we need to figure out the rest of the layers, which is where it becomes difficult. How many layers do we want? How many guests will come? Will your parents want to invite their friends you have never met? Will your significant other want more or less? And what if they want bigger and nicer glasses on top? Circling back to our point from above, these questions and pressures can lead to not feeling in control of how many layers there will be, forcing the focus towards just needing more champagne. However, as many people say – the wedding is about the couple and no one else. This is easy to say, but difficult to execute. If the couple can communicate, get on the same page, and realistically come to a conclusion, then it doesn’t matter how many layers there are because it’s all about what the couple wants. Once the couple knows what they truly want, they can begin to realistically maximize the champagne they have access to. And if they don’t have enough champagne to fill up the bottom row, that is okay because they filled every other glass that was more important.
The layers of glasses can range from retirement savings to a trip to Europe. Having the ability to have honest conversations with yourself and/or your significant other about what is important is when you can start to gain control of your tower. The tower’s height and mass will change over time, so it’s always a good idea to check in on the anniversary date to see if your tower is still consistent with what you thought a year ago. We can confidently say the tower and the champagne amount will change over time. Recognizing this will help allow for agility and change. Sometimes the change will be forced and sometimes it will be of your own construction – the only constant will be inconsistency.
Our champagne tower analogy is simplistic; the natural shape of the tower forces us to focus on certain goals before moving on to the next one. The true complexity is making deliberate efforts to shift one’s focus from the income (champagne) to the expenses (glasses). Furthermore, one must sift through the societal noise and have an honest conversation with themselves and/or their significant other to understand the goals they want to achieve. Understanding that life, values, goals, etc. change over time is key. The size of the tower and the flow of champagne will evolve; the ability to recognize this will allow us to position ourselves for opportunities that we may not have thought possible once before.