According to Fed Chairman Jerome Powell, the economic outlook is bright. Unless, of course, it isn’t.
The headlines are compelling these days: ‘Record Earnings at Apple”, “Facebook Smashes Revenue Estimates”, not to mention the constant chatter about cryptocurrency, SPACs, run-away inflation, and bubbles (not the fun ones!). Even ‘when is the housing market going to crash?’ is a red-hot search on Google these days.
According to Fed Chairman Jerome Powell, the economic outlook is bright. Unless, of course, it isn’t. If we have another serious outbreak of Covid or some other catastrophic happening, all bets are off. So how do we prevent financial disaster? Better yet, how do we achieve financial security/success/independence in spite of headlines, market cycles, or fat-tail events like Covid or the 2008 mortgage meltdown?
Be intentional with your money-have a plan
Having a written financial plan is important. Evidence shows that those who put their goals and plans in writing achieve more success than those who do not. Every financial book dedicated to financial success emphasizes focusing on what you can control.
Within Your Control:
- Asset Allocation
Not in Your Control:
- Interest Rates
- Market Performance
As financial planners we help you think through the best ways to plan for and hedge the items listed in the “not in your control” column. Another way to think about the “not in your control” elements of your plan is to identify each one as a distinct variable to financial security.
The “within your control” items are exactly that. You determine how much you spend, borrow, and save. Working through an asset allocation with your investment manager allows you to manage the risk in your portfolio. It is also critical for managing your own stress during the inevitable market downturns. Knowing you have thought through and committed to a strategy and a plan that is well suited for YOU protects you from panic selling during market meltdowns and is vital to your financial security.
Being intentional with your money also means every dollar has a purpose. For some it is better to start with the end in mind. In other words, start with your big goals. For others, a bottom-up approach like focusing on a budget is more illuminating. Whether you take a top-down or bottom-up approach, starting with an understanding of your goals is what sets you up for success.
Set Goals & Save
Goals can vary over the course of a lifetime. We know that eventually retirement looms for almost everyone and it is very probable that you will be dependent on your retirement savings for three decades, or possibly more. Therefore, it is important that, regardless of your phase in life, one of your goals is retirement. Other goals might be saving for a house or 2nd home, paying off student debt, starting a new business, saving for your children’s college, planning a big vacation, just to name a few.
Once you have determined your goals and priorities, assign a timeframe, amount, and funding plan that should be measured periodically. When possible, set up your savings so that the funds are automatically debited from your checking account. It makes the entire process seamless and easy. Plus, you won’t be tempted to do something else with the money!
Measure Your Progress
Hopefully, you recognize that achieving financial security is a long-term process. Once in a while someone gets lucky and wins the lottery or has some other significant liquidity event (which still requires financial planning!) that helps them achieve financial security in one fell swoop. For most of us it is more of a “slow and steady wins the race” achievement.
Measuring your progress may include:
- Annual review of your financial plan with an advisor
- Back-testing original assumptions and amounts
- Monthly or quarterly updates of a savings spreadsheet
- Periodic conversations with a spouse or partner, “are we still on track?” Or “have our goals changed?”
If retirement is looming within the next ten years, taking a more granular approach is recommended. Look at your current monthly expenses and annualize them; then project your retirement income on a monthly or annualized basis. Is income greater than expenses?
The rule of thumb formula for Financial Independence = 25 x (annual spending/annual income). This is the “4%” rule flipped around to determine how much we need to save.