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When it comes to investing, how many people live on the outskirts of hope?

President Lyndon Johnson first uttered similar words in his State of the Union address in 1964.  In declaring the war on poverty, Johnson said, “Unfortunately, too many Americans live on the outskirts of hope.”

The same can be said for investing. Over the years, we have come in contact with plenty of people who are living on the outskirts, financially speaking.  We can identify these folks through the language they use describing their situation:

  • “I heard ____ is a good mutual fund. Should we buy that?”
  • “My friend made a lot of money in ____ stock. Is now a good time to buy?”
  • “I had some investments, but then something came up and I needed the money.”
  • “I’ve never made a nickel in stocks, I just don’t have the knack for that.”
  • “That investment we bought is up about ten percent. Shouldn’t we sell it?”
  • “I’m worried about the election. I think I should be about of the market. At least until things settle down.”
  • “I’m retiring soon. So I think all my investments should have zero risk.”

Maybe you have heard friends mention these very same refrains. These comments and questions may be symptoms of bigger issues brewing beneath the surface. In our conversations with folks who make these kinds of comments, we learn the “money foundation” of their lives is usually stitched together on sand.

Meaning, there is no proper footing. And the slightest problem can create chaos.

We spend a great deal of time with folks discovering how well their financial foundation has been constructed. And we often will not move forward until the foundation is in place.

So how do we get from the outskirts of hope, financially speaking? It starts with three steps:
1. Build a firm foundation
2. Having some patience
3. Execute a plan.

Build a firm foundation

Most financial problems start and end right here. Creating a firm foundation at the base of a financial pyramid comes with knowing the numbers. Know how much income is coming in, have a grasp on ordinary monthly expenses, and anticipating larger (or one-time) expenses.

outskirts of hopeAlso know, with precision, the amount of outstanding debt. And the plan for paying the debt off permanently (not refinancing). But there’s more.

The next part of a firm foundation is understanding the difference between “operating” and “reserves.” Most folks on the outskirts of hope today have only an “operating account” and may not have a “reserve account” at all.

But let’s not be so formal, OK? Most folks call their “operating account” their “checking account.”

In the operating account, we see money coming in each month. And we see expenses getting paid out. What’s left over at the end of the month after paying all the expenses, should get moved to the reserve account. Understanding and knowing all these facts and figures is a part of accepting responsibility for the plan.

The goal of understanding operating and reserve accounts is crucial to having a firm foundation. The excess amount beyond expenses needs to be set aside on a regular basis. How many times have you heard someone say, “I just can’t seem to make ends meet?” Or, “I can never seem to save!”

So, part of building a firm foundation is getting enough in the reserve account. The aim is to accumulate three months of ordinary expenses, or longer. This is very important at all ages if there is a job change, job loss, illness or emergency. And sometimes the “bill” for an emergency can add up to a month or more of typical expenses.

Too many folks have no foundation to rely on. This needs to change. Some folks truly are in bad situations. It may be caused by an illness, a family situation, or job loss. But their current expenses might temporarily far exceed their income. Bad things do happen to good people, including family and friends. We need to be prepared for these events ALL the time.

However, there is a difference between someone who runs into unfortunate circumstances, and others who have overspent their income or take on too much debt. Taking on too much debt, or having an “unbalanced balance sheet” is often a lifestyle problem or stems from some poor decisions. If there is income, many balance sheet problems can be addressed.

When allocating your reserve account, know this account should be banked. The reserve account should be always available and not at risk. It’s surprising to see so many folks online these days stressing to “not let your cash sit idle!” And vehemently stress “maximize the return on your cash!” Please do not be intimidated by these messages found online! This is your emergency cash. Someone close to you may need this money, often at the worst possible moment. And the money will be needed immediately. It’s not an emergency stash if someone needs to wait for the market to turn around.

Having Some Patience

If someone is just starting out toward a firm foundation, it will take time to build up several months of expenses in a reserve account. This is where good intentions can go astray. We have lost count of folks that have started to build a decent reserve, only to see it dismantled because a “unique opportunity” happened to spring up. In one of the very first podcasts we produced here at the firm, Brendan and I discussed how the approach toward financial decisions can change once there is some money available. Decisions can come quicker if someone has a reserve. Especially a reserve they built on their own. It becomes easier to weigh the difference between “I need that” and “I want that.”

This is probably the hardest part of moving folks from the outskirts of hope, closer to the center of town. Build up the reserve by saying “no” more frequently. Then watch your choices and opportunities change for the better.

One more bit about patience. When Warren Buffett turned 65 years old in 1995, he had a net worth of $8 billion dollars. At age 90, his net worth is now over $80 billion dollars. Buffett has not made more investments in the past twenty-five years. He has probably made fewer investment decisions in the last twenty-five years. Most of the returns from compounding come much further down the road than people expect. The only way to get further down the road is through patience.

Execute The Plan

Having a plan in place makes the work easier. Having a written plan in place seems to make the work go even faster. The written plan, which should include all the income and expense numbers, and milestones of increasing your reserves, will make the goal real. But knowing the numbers, having patience to work the plan, along with some vision of the future can make it all happen.

The stock market will still be there when your firm foundation is cemented in place. We live in a world where patience is a rarity, where society counts speed as an asset and no one knows the value behind the word “no.” This is a trap to be avoided! Please do not fast-forward to the next step (investing) before completing your firm foundation. The firm foundation moves you from the outskirts of hope.

Please notice we have not mentioned investing in a value stock fund, or emerging markets or junk bonds. Or penny stocks, or Bitcoin. We’re not there yet. Investing for growth happens after the firm foundation is in place. And the “speculating” portion of your investments is the “tippy top” of your investment pyramid. It not easy moving from the outskirts, but it can be done.  You can get started by scheduling a meeting with us.

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