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Imagine that you and your family are about to take a cruise to the Caribbean. You’ll be stopping in St. Lucia, Grenada, and St. Vincent and the Grenadines. You’re excited for what should be an excellent trip, but upon boarding you find out that the ship is taking on water. Are you still going to the Caribbean? Not likely, unless they fix the ship’s holes. Despite how obvious it seems to not board a ship that’s taking on water, people neglect the holes in their financial ship all the time.
Think of your entire financial situation as the ship. Your goals are like the stops on a cruise. These might include buying a home, saving for a child’s college education, and retirement. Reaching those destinations will be pretty much impossible if your ship has holes in it.
What are considered “holes” in your financial ship? High interest rate debt and not having an emergency fund are huge ones. In fact, sometimes not having an emergency fund is the reason for high interest rate debt. High interest rate debt damages your ship and decreases your odds of achieving your financial goals. If you think of these two issues as holes in a ship, it only seems intuitive to fix them before undertaking any journey. However, we often see people with high interest rate debt and no emergency fund looking for advice on investing for college or retirement. They want to discuss their cruise’s destination when they’ve got a ship full of holes sitting in the harbor, or worse, they’re getting ready to leave the harbor for the Caribbean with holes in their ship.
Investing to reach your long term goals is a great plan, but one that needs to be predated by a thorough financial examination. The first step is knowing your monthly number. Are you operating at a profit or loss? This may or may not mean creating a budget. The next steps include eliminating high interest rate debt and creating an emergency fund with 3-6 months of expenses in it. After that, you can talk about what financial goals you’d like to accomplish and how you intend to get there.
Investment strategies and asset allocation are important topics that can be broached after you make sure you aren’t boarding a damaged ship. Think of those subjects as the engine and rudders of your financial ship. They will guide your journey once the ship is safe to sail and you know where you want to go. Spending any time debating which engine and rudders your ship needs while it’s full of holes is kind of like discussing investment strategies when your real problems are eliminating debt and creating an emergency fund. You’ve got to prep the ship before it can sail.
Ben Carlson of A Wealth of Common Sense put it well writing that, “For 9 out of 10 people, managing their personal finances is going to be far more important than managing their portfolio or optimizing an investment strategy”. Eliminate high interest rate debt and get going on that emergency fund! Both will likely help you sleep better at night, and you’ll be a step closer to your long term financial goals.