Financial Lessons from Bilbo Baggins

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I’m excited. I just bought my tickets for The Hobbit: The Desolation of Smaug.

Anyone who knows me personally (or on Twitter, which is almost the same thing) can attest to my deep, true love of all things Tolkien. I love the stories, the cinematography and the complex characters, particularly Bilbo Baggins. For all of his shortcomings, the titular Hobbit’s got a big heart and strength of character. And if you pay close attention, you’ll notice he is quite savvy with his finances.

Here are a few lessons we can learned from our hairy-footed hero:

Warning: this list contains spoilers. If you haven’t seen the first installment of The Hobbit or the Lord of the Rings trilogy, bookmark this page and marathon the series. For added fun, take a drink each time someone speaks Elvish or says “precious.” Come back here when you are done.

1) Live beneath your means – Between the one ring of power and an armor of mithril that was worth more than the entire shire, Bilbo Baggins was the richest Hobbit alive. You’d never know it from his Hobbit-hole under the hill and simple lifestyle. Randall Reinwasser, a Certified Financial Planner for Solitude Canyon Investment Advisers, says, “The only way to achieve financial independence is to live below your means. To put it another way, you have to produce more than you consume, and invest the difference wisely.” Rather than upgrading your lifestyle to match your assets, see if you can comfortably spend as you always have and put that money towards paying down debt, saving for retirement, or even setting up a college or trust fund.

2) Plan your estate – Before retiring to Rivendell, Bilbo willed everything to Frodo to ensure that his pesky relatives, the Sackville-Bagginses, didn’t take over Bag End after his death. Reinwasser recommends that everyone create a will. “You can specify how you want your burial handled, who you want to raise your children, who should take care of your pets and, of course, how your financial assets should be allocated. If you die intestate – that is, without a will – you leave these decisions to the whims of a judge who doesn’t know you.” Reinwasser also suggests that savvier planners with substantial assets look into a revocable trust to set up tax-planning provisions and provide beneficiaries with easier access to their inheritance.

3) Know your specific retirement goals – There is a moment in the first installment of The Hobbit where Bilbo looks back at Rivendell, the beautiful home of the elves, like it’s the most fantastic place he’s seen. After his 111th birthday, he leaves Hobbiton for Rivendell and retires there. While you may not yet know where your Rivendell may be, it’s important to think of retirement as a specific destination. “Most people have a vague idea that they’re going to need a bunch of money when they want to retire, but they’ve never actually sat down and calculated how much they’re going to need,” says Reinwasser.

To determine your specific goal, Reinwasser recommends first calculating your annual spending in retirement minus secure sources of income, like Social Security. “Your retirement savings need to be roughly 25 times that figure. So if you think you’ll need $70,000 per year in retirement and you’ll receive $30,000 from Social Security, your portfolio needs to be $1 million. This number shocks most people when they first see it, but it’s an easy goal to meet if you start saving early. The later you start the more of your income you have to save.”

4) Gold is precious – Reinwasser recommends having gold buillion in your portfolio as insurance in an uncertain economy. Assuming your gold doesn’t have to be cast into the fires of Mount doom, it makes an excellent diversifier for your investment portfolio. “If it doesn’t do well in a given year,” he says, “that’s a good thing because the rest of your portfolio will probably give you a nice return.” If you are looking to make a profit from the gold you have on hand, be wary of businesses that offer quick cash for your precious goods. “The unsuspecting gold seller may often receive less than one-third the value of their gold,” Reinwasser says. “Their best bet is to take their gold to two or three pawnshops and sell to the business that offers the most.”

5) Be open to opportunity – One of the most pivotal moments in The Hobbit (and the overall fate of Middle Earth) is Bilbo’s decision to join the dwarves. He easily could have stayed home, ruminating over the worst dinner party he ever hosted and continued his quiet life in his sunny Hobbit hole. But with that step out the door, he opened himself to legendary adventures, untold wealth, and an integral role in the fate of the world. While you may have fixed goals, it’s important to recognize opportunity when it creates a mark on your door. For all you know, that job offer, small business idea, or option to relocate could be the start of your greatest career venture. Don’t limit yourself by sticking within only the parameters of your current path. As J.R.R. Tolkien famously wrote, “Not all those who wander are lost.”

Photo credit: Warner Bros. Pictures

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