So what are your priorities? All plans are driven by cash flow, your habits, and where you direct your essential and discretionary spending. A big take away in building your personal plan is knowing where your money goes each month. It’s easier on our brain to think in monthly terms and then annualizing all of our expenses. How much should we save and invest? Where should that be directed? Your cashflow drives a lot of your decisions today, and it will drive more decisions tomorrow. One way to master your cash flow is to utilize automation.
Automation tools allow you to direct the right monies to right account, automatically. This may include increasing your cash reserves for a home improvement or upcoming vacation based on a short term priority. One of the great features of online banking is the ability to establish reoccurring transfers from one account to another. Each time you get paid, you’re able to automatically transfer money to another account, which gets you closer to achieving your goal(s). This can work to your advantage regardless of timeframe. It can work in helping you reach a short term goal just the same as it can with goal over a longer period of time. With a 401k, you may set up a percentage of your income to be deferred from each paycheck. Without thinking about it, you’re saving for tomorrow in a tax advantaged approach at each pay period. You may also create automated contributions to college education accounts or accelerated debt payments. Planning for tomorrow takes time, patience and persistence. An effective strategy may include thinking above and beyond what your employer provides by selecting some investment opportunities on your own, or with the help of a financial professional.
Once you begin to look at your calculations on cash flow, you may start asking yourself this question, “Am I setting aside enough to accomplish my goals?” or “Is this even possible?” This is where working with a professional planner may prove helpful. You may, in fact, be sending the right amount of money to various accounts however you may not be selecting the right investment choices based on timing and first use. For example, holding safer cash investments in your 401k may feel good as you see the balance steady. Unfortunately, when retirement comes, it’s likely that your cash holdings will not be enough to meet your goals for the 20+ years after you retire. Now what? This is where looking at the various choices allows you to gauge your appetite for risk now and tomorrow. There is very little risk in holding cash investments in your retirement account now. There is a significant amount of risk when looking to stretch those cash dollars for income needs over longer periods of time.
When creating a plan, you need to ensure that you are protecting for future purchasing power. Select investments that stand the best chance of hedging the rising cost of life rather than those based on what’s currently “hot” in the market, or investing in funds merely because they are beating benchmarks.
More on this next time…
Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Flowerstone Financial are not affiliated.