Alexander Graham Bell, famed inventor, scientist, and engineer, once said, “Before anything else, preparation is the key to success.” When it comes to finding success with your money, the approach is no different: preparation is the key.
Unfortunately, many fail to prepare, suffering from procrastination, inadequate financial knowledge and a sometimes confusing array of financial options. This leads many to look back as they approach their “work-free” phase of life (aka retirement), wondering what they should have done differently to find success with their money.
This is a difficult but avoidable dilema. While none of us know what the future might hold, there are vital steps we can take to future-proof our finances and create optimal outcomes for our financial wellness.
As a trusted financial advisor for over three and a half decades, these are four steps that I’ve identified to future-proof your finances:
1. First, keep ample cash reserves on hand.
Cash reserves exist as a buffer between you and the inevitable ups and downs of life. At times, they help you weather the storm, and at other times they allow you the freedom and flexibility to do what’s best for your life, even if it’s going to cost you—like taking time off of work to care for a loved one.
If you think of your finances as a castle, cash reserves would serve as the moat. That moat is there to protect your finances from unexpected or unwanted circumstances that may arise. These unforeseen issues can be as minor as a small car repair or as significant as a job loss or sudden illness.
As a general rule of thumb, most financial professionals recommend keeping somewhere between 3 to 6 months of living expenses as a cash reserve. However, this amount can vary depending on your situation, preferences, and needs. Typically, I recommend six months of living expenses as default during your working years and somewhere between six months to a year of living expenses during retirement.
While it’s true that holding cash reserves can create a “drag” on your portfolio since yields are low and that cash could be earning a better return if invested, they are still worth it. For many, having ample cash reserves during a job loss or market downturn may be the only thing standing between them and having to liquidate retirement accounts, which would create a significant and lasting drag on their portfolio.
While they may not be the most impressive part of a well-balanced portfolio, cash reserves count big when you need them the most.
2. Spend less than you earn.
It’s simple in theory, can be difficult in practice, and is one of the most significant predictors of financial success. By creating a positive gap between your earning and spending, you give yourself the ability to save and purchase freedom in the future.
In addition to purchasing freedom, that savings gap can be instrumental during periods of reduced income or high and unexpected expenses. Because you’ve created a gap between your earnings and your spending, you can use that gap to cover emergency expenses or rebuild depleted cash reserves, if needed.
Alternatively, a negative gap between your earning and spending is one of the most surefire ways to end up in bankruptcy, sorting out your financial affairs with the help of the legal system. Even matching spending and earnings can be a recipe for disaster, as it never allows you to fully fund your retirement savings needs, trapping you into working much longer than you might want.
When it comes to spending less than you earn, you may find that a values-based spending plan or monthly budget is the solution. Simply put, it’s essential to sit down and get a clear understanding of what things you spend money on that you derive enjoyment from and what you spend money on that don’t provide any joy. From there, design a spending plan that spends lavishly on the things you value while economizing on the things that aren’t important to you. By designing your budget in this manner, you may find it easier to stick with as you’ve aligned your spending and your values—a recipe for long-term success.
3. Solve for sleeping well at night.
It doesn’t matter if you’ve found the most mathematically optimal strategy for reaching your financial goals—if it doesn’t allow you to sleep at night, it’ll never work.
While you may find that the best long-term investment returns come from an aggressive investment allocation, if the violent swings cause you to lose sleep at night, it’s not going to be a good fit. This is where you need to take a step back, understand your personal appetite for risk, and design an investment portfolio and financial plan to match.
For many, this means opting for a strategy that is still mathematically sound but may not be the most aggressive and optimal route. In practice, this may look like introducing a percentage of bonds or other more stable asset classes into your portfolio, allowing diversification to dampen down the volatility, leading to a smoother investing ride, despite lower overall returns.
As you’re presented with various investment opportunities and financial strategies, ask yourself: “Is this in line with my appetite for risk? Does this allow me to sleep at night, or will I be a nervous wreck?”
The answers to those questions should be your guide post when you are evaluating various options and strategies. In addition, it may be time to reflect on your current portfolio and ask yourself those same questions. Are your existing investments in line with where you want to be? Are they allowing you the peace of mind you need to sleep well at night, or do you struggle to find peace during periods of market volatility?
4. Hire a trusted professional.
There’s no way around it—finances can be complex. There are many different ways to reach your financial goals, each with its own unique set of pros and cons. As you begin to future-proof your finances, you may find that you’d like to speak with a professional and get a second, objective set of eyes on your situation.
As a CERTIFIED FINANCIAL PLANNER™ professional, working with clients for over three and a half decades, I enjoy guiding clients through a series of meetings, exercises, and financial planning discussions to help them future-proof their finances. Nothing provides me more satisfaction than knowing my clients have set themselves up for a future they desire and they’re sleeping well at night because of it.
If you’re interested in a complimentary call to discuss your financial goals and come up with a plan to reach them, I would love to help.
You can schedule time with me by booking a meeting today.