It starts with treating your money with purpose and intention. How do you accomplish this? You give each of your accounts a job description with a specific timeline and purpose. Failing to do this puts you in a reactive position when life happens, and expenses and opportunities present themselves. The best choices you may make now include getting a clear picture on your cash reserves. How much is necessary? Six months or three months of fixed expenses in a savings account? It depends on how predictable your income is and should include other incentive compensation and bonuses that flow into your general spending account. You may have an employment contract that’s ironclad, you may also run a business with cashflow uncertainties each month. Getting clear on how much cash you need for emergencies, general reserves, and for other big-ticket expenses is necessary before you begin to invest. What’s a big-ticket expense? Any onetime purchase that may move the needle in your monthly cash flow. Having money set aside in advance is part of planning and leads to a better purchase experience.
Tracking what you spend is helpful on a monthly basis, but don’t get into the weeds. Having a rough idea on your net pay each month and your top five reoccurring expenses may be enlightening. For those who charge all monthly expenses to a rewards card, take a minute to look at your yearend summary as to where the money goes. Break it down in chunks, look at the last three months of spending, are you surprised? Others who use a debit card may have better clarity on what consumes their attention and dollars each month as the monies directly leave their account. Regardless of your spending habits, the key is raising your awareness on where the money goes. Don’t restrict how you spend until you know where you spend. This is valuable and worth repeating, don’t restrict how you spend until you know where you spend.
Now that you know where the money goes, how can automation help you save more towards priorities and goals you classify as important? Keeping all your banking accounts centralized at a single bank and using preferences and nicknames is a start in spending your money with purpose. This includes creating a future fun account to pay for a summer vacation. Move a set amount of money to this account after your direct deposit clears. Utilize other short-term checking accounts for kid’s summer camps, hobbies, and the home improvement project you’ve been thinking about. By creating automated transfers at a frequency that works for you, you accomplish goal funding without having to think about it. Your time is too valuable to remember to manually move the money every two weeks. Leaving excess dollars without purpose in your general spending account will most certainly lead to them evaporating before you know it. “Lifestyle creep” is for real and takes place when you begin spending more than necessary on essential and discretionary expenses. Often a result of increased cash flow or excessive cash hanging out in your general spending account without a purpose. This is completely avoidable by using automation and reviewing your spending every six months. When your money serves a purpose, your money serves you. Don’t let it control you or negatively influence your consumption habits. Create a system and test drive it for the best results.
Cash reserves are set, you’ve automated your spending and know what it takes to run your financial house each month, well done! Now it’s time to invest while considering your medium- and long-term goals. Ideally, your net pay already factors in you maximizing your pretax or Roth 401k/TSP. If not, login in and increase your income deferrals now. This is great platform to building your wealth and where income may be generated when you decide to repurpose your time one day. Remember, these are long term investments that aren’t necessary or needed tomorrow. Choose wisely as to where you invest and ask for help if necessary. Education planning may be a priority to you, check out the savings plans that your state offers to maximize your investments and potential tax savings.
Next, consider creating an after-tax investment account and adding to it each month. Don’t be a hero and try to identify the next big it company or limit your investments to a particular industry. A better choice is selecting an exchange traded fund that tracks a particular index. Perhaps small, medium, and large sized companies here in the US. Don’t discount companies outside the US, they have just as much growth potential too. By purchasing a fund or several that include hundreds or thousands of companies, you remove pressure and the natural second guessing that arrives after you’ve made your investment decision.
The logical order of these steps assumes you carry limited debt. If you are stretched or if your spending got in front of you, consider mapping out a plan to exhaust what you owe. Rarely does it make sense to invest while managing revolving debt that may carry high interest costs. Having a debt management plan that complements your financial house makes a positive impact on your future.
Long term investment success arrives over time, lots of it. Think in decades as opposed to years. A diversified portfolio should be goal driven and be serving a purpose that gets you closer to what you want. Enjoy your account growth when times are good (the last 9 months or so). Be ready and prepared to continue your purchasing when times are more uncertain (think last spring). This is completely irrational and goes against every emotion you feel as you watch your account contract. It’s during these times when what you invest goes further as you purchase more companies at lower prices. Most will rebound and then contract again, that’s the investment cycle so don’t be surprised. Save yourself some time and don’t attempt to understand or rationalize why price movements are taking place. Accept it and embrace volatility as an opportunity to purchase more great companies at reduced costs. Increase your investments as cash flow allows, reflect on your plan and current approach, go live your life. One day will arrive and you’ll be ready to repurpose your time and may be surprised on what’s accumulated and available for spending.
Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Flowerstone Financial are not affiliated.