1:52 – Should I sell my stocks to cover expenses from an emergency room visit?
4:39 – Financial shocks
6:28 – Tax on the poor
emergency fund
Fixing the Holes in Your Financial Ship
Subscribe: RSS
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.
47% of Americans Save Nothing
A recent chart from Deutsche Bank’s Torsten Sløk shared on Business Insider shares a scary reality: 47% of US households don’t save any part of their current income.
Of course, as Anthony Isola put it on Twitter, “Making lemonade out of lemons, 53% save something!”. Some people truly don’t have the means to save any part of their paycheck, but many others simply don’t because they think $50 a month or $20 a week will never make a difference. They couldn’t be more wrong. The power of compounding returns will amaze you over time.
Start saving in any way you can. First, build up an emergency fund containing 3-6 months of expenses. Then, consider investing additional savings for your future. Participate in the retirement plan your employer offers or think about opening an IRA or Roth IRA if they don’t have one.
Sitting down with a good, fee-only investment advisor is a nice place to start if you’re confused about your finances. They’ll be able to point you in the right direction and get your saving and investing plans on track. Don’t forget that when it comes to saving money, every little bit helps. It sounds cliche, but it’s true.
Source:
http://www.businessinsider.com/half-of-america-doesnt-save-any-money-2015-3
The Importance of Knowing Your Monthly Number
The beginning of a new year presents an optimal time to set goals for yourself. Last week, Tom discussed financial New Year’s resolutions on the weekly video. I recently read an excellent post from Kris Venne of Ritholtz Wealth Management regarding knowing your monthly number that I thought went well with that video’s message.
In his post Kris shares the first question he always asks when creating a financial plan for clients:
“Putting discretionary extras aside, what does your month to month lifestyle cost you?”
He goes on to explain how very few people are able to answer that question. Kris is spot on with this and I highly recommend reading his post, which I’ll link to below.
You absolutely must know your monthly number. The importance of knowing it cannot be stressed enough. How can you invest for the future when you aren’t aware of how much you can afford to put away each month? You really can’t. Knowing your monthly number is also important because it gives you a ballpark idea of what your expenses will be like when you retire. Kris’s recommendation to begin the year by sitting down (by yourself or with your spouse) to figure out your monthly number is an excellent one.
Once you have your monthly number, you can move forward with the three steps we discussed on the weekly video: creating an emergency fund, rounding up your “sleep easy” money, and investing the rest in a way that suits your individual needs. Financial planning doesn’t have to be super complicated. As we discussed here on the site before, our financial planning sessions begin with a simple conversation and a yellow pad.
Source:
http://krisvenne.tumblr.com/post/106645348700/whats-your-number
Preparing for Financial New Year’s Resolutions
As 2014 comes to an end, we share some timely tips for those who intend to make financial New Year’s resolutions. Tom has some words of wisdom that you should keep in mind: Don’t play the stock market with the rent! He elaborates on the meaning of this in our weekly video.
What Tom means by his advice to avoid playing the stock market with the rent, is that being ambitious about saving is good, but doing so at the expense of other critical financial safety nets might be a mistake. We’ve seen people increase their retirement contributions, only to withdraw those savings because of an unforeseen event.
You can think of your financial situation in terms of buckets to simplify things.
Bucket 1 – The Emergency Fund
Accidents happen and they tend to cost money. A new car transmission can cost $2,500, and a trip to the emergency room can cost even more. Be sure to have an emergency fund in place before designating money for investing.
Bucket 2 – Your “Sleep Easy” Money
Some people enjoy having a certain amount of money in the bank at all times. We like to refer to this as your “sleep easy” money. Whether it’s $5,000 or $50,000, your number is appropriate and should be in that savings account helping you sleep at night.
Bucket 3 – Investing
After you’ve earmarked your emergency fund and “sleep easy” money, the rest can be allocated for long term growth.
We thought this would be a nice reminder for any investor looking to make financial New Year’s resolutions in 2015. Remember, don’t play the stock market with the rent!
Savers Still Heavily in Cash
In August of this year, BlackRock did a survey of 4,000 Americans. One of the most interesting things they discovered was surprising to me. According to their survey:
“As was true in our 2013 survey, “cash remains king” with almost two-thirds (63%) of all savings and investments held in cash?and most of that in traditional checking and savings accounts (51%).”
There are certainly good reasons to hold cash, like a financial safety net for example. We’ve blogged about emergency funds and how necessary they are previously (https://mullooly.net/how-much-money-should-be-in-my-emergency-fund/6436). Having cash in the bank makes people feel safe and helps them make more rational decisions.
There’s room for cash in any portfolio, but having too much cash brings opportunity cost into the equation. While many investors are still risk averse after experiencing years like 2008, sometimes the biggest risk for long term investors is not taking any at all.
Emergency funds, allocations to cash, and other portfolio based questions are obviously ones to talk about with your investment advisor. I wanted to share those numbers from Blackrock though because I thought they were pretty crazy.
Source:
http://www.blackrock.com/investing/insights/investor-pulse/overallocation-to-cash
