Are you thinking about investing for the first time? Maybe you’re tempted to rebalance your 401(k) or Thrift Savings Plan but uncertain with outcomes of the debt ceiling or tax legislation debates.
Spontaneity makes for great date nights and getaways, but it is not necessarily the best for your financial security. Recognizing that life tends to dish out surprises, it pays to have a plan. In the words of Denis Waitley, “Expect the best, plan for the worst and prepare to be surprised.” Here are five steps to building solid financial groundwork before you begin investing.
1. Start at the end, then work backwards: Define and align your goals
The risk of taking action without an intended goal is that you may end up in a place you’d rather not be. Recall the Cheshire Cat’s advice to Alice:
Alice: “Would you tell me, please, which way I should go from here?”
Cheshire Cat: “That depends a good deal on where you want to go.”
Alice: “I don’t much care where.”
Cheshire Cat: “Then it doesn’t much matter which way you go.”
Good planning is goals-based. What are your goals? Why are you doing this? They may be short-term (paying off debt, purchasing a car or a home, planning a wedding, etc.) or long-term (college education for kids, your retirement, etc.). Define and align your goals with those of your significant other. Once you know “what and why,” the rest is easier.
2. Know the flow: Cash flow and budgeting
Remember the wisdom of “spend less than you make?” Now, add to that, “know where your money goes.” It’s essential to know your cash flow – both where it comes from and where it goes.
Two common threads for the most financially successful people I have met over the years are: 1) they know what it takes to maintain their standard of living. Some know where their paycheck goes to the penny, and others know they need $X a month and live within that budget; 2) they’re serial savers. One of my favorite client sayings is “we know how to save… not pennies but hundreds.”
There are a number of personal finance apps that assist with budgeting, including Personal Capital, YNAB (You Need A Budget), Mint and others. Find the one that works best for you and your needs.
3. Cash reserves
Have an emergency reserve sufficient enough to carry you through life’s surprises. These surprises can be anything from a job layoff to an unexpected car repair or even a prolonged illness. A good rule of thumb is to have enough to cover at least three months of living expenses. Keep this in an FDIC-insured account that pays a competitive interest rate.
4. Protect yourself (and your family)
Life tends to be curly. Hence, it’s advantageous to protect yourself (and your family) and have contingency plans. Protection includes a wide range of strategies:
- Develop skills to be marketable.
- Diversify so you don’t keep all your eggs in one basket, and avoid significant monetary loss.
- Build a support system, whether social, professional or both.
- Get insurance to protect yourself and your family from a catastrophic event (medical, disability, death, fire or liability).
- Create legal agreements (estate plans, buy/sell and business continuation, etc.)
5. Review the plan: Fine-tune or reboot as needed
A road map is essential for a successful road trip. It helps you set your course by giving you explicit directions, tells you where you’re at and makes adjustments along the way should you need a detour. Review your plan at significant transitions in life, or at least annually, with your trusted financial advisor.
May this sage advice help you secure your future wisely and invest successfully.