Too often financial advice assumes that we have all of our ducks in a row. You know, that we live simple lives where we save early and throughout our careers, treat marriage and children like simple financial decisions, and follow a budget. Then reality strikes. There was a Black Swan lurking and, like every Black Swan event, it was not foreseen. In fact, it was unknowable. Even when we have health insurance, life insurance, disability insurance, and great homeowner’s coverage, life throws a curveball that we just can’t hit.
Despite all of these things, I’d like to think that I can construct a basic financial plan that helps me get on the path to security. A plan that helps me fight off the curveballs of life. No, I can’t predict an event that I don’t know anything about, but I should be able to put myself in a financial position to absorb more of life’s challenges.
Financial Planning is destined to be an imperfect science. Despite using Modern Portfolio Theory to mathematically create a risk-adjusted portfolio, the markets will still dictate returns. Hopefully, my portfolio can absorb it. A financial plan relies on sound markets, a strong currency, and a sane electorate as its base.
Even if the next Great Depression is on the way, there are basic steps to take that will help assure a brighter financial future.
1. Be optimistic. We have to believe that the world is not ending, the dollar is not going to fail, and we won’t lose everything to inflation. I’m not saying take the blue pill and live in blissful ignorance. I’m arguing to take the red pill knowing and then build a better place with the knowledge it brings. Decide to proactively pursue a bright future.
2. Start tracking your spending habits. Before you can get going on your budget you need to have a basic understanding of what you are spending. I use Personal Capital to track spending and investments. It nicely puts all of your accounts in one place.
3. Put your money to work with a budget. Give your money purpose by putting it to work. Before your paycheck arrives, know where it should go. This is commonly called, wait for it, creating a budget. Here’s the secret. You have to make sure that your have a plan for every dollar or you’ll see your paycheck and bank account like a line of credit that can be spent on whatever you want! If your dollars are assigned to a specific task, you’ll see that the “Shoes” category only has $20 and pass by the $100 pair until you’ve saved for next time. Consider using YNAB.com. You purchase their software and it helps you put together a great budget.
4. Save 10%. Savings is a budgeting category but needs to be emphasized. In a perfect world, we would save 10% per month until we had about six months worth of cash savings ready for a rainy day. After that we’d put 10% into our investment portfolio for retirement. We would also save for future purchases, like that big family reunion on the Disney Cruise line. By putting a little bit toward your family reunion fund each month, you’ll find that you are paying in cash instead of using a credit card. I have an online savings account with CapitalOne360, an online bank. I like that I can have one savings account and break into different categories. After that we would begin to…
5. Insure yourself and your possessions. Stick with term life insurance. Permanent insurance is too expensive for the average person. Term insurance is protection for your family in case of loss of life or ability to work. It’s a critical part of your portfolio. How much life insurance do you need? Use LifeInsure.com as your online life insurance resource.
6. Build a risk adjusted portfolio. By this I mean allocate your money across a broad range of assets and rebalance. The best way to do this is to sign up for Personal Capital or MarketRiders. Both will tell you exactly what your asset allocation should be. Don’t get caught up in penny stocks or newsletters from gurus. Embrace diversification.
Hopefully you see how easy it can be using online financial tools. These are the basic, simple steps that create powerful results. This is not the path to billionaire status, but that’s not the journey we’re on. We are just looking at ways to easily secure our financial future. As you start down the path with these tools, your knowledge base will expand and you’ll see the possibility of putting your house in order. It’s a great feeling.