The government avoided another shutdown this past weekend, at least temporarily through November. Running out of money, whether you’re a government or an investor is no fun! We all have different backgrounds and opinions on money, debt, and how our cash flows are structured. Here’s what’s working to keep my family’s financial house open for business, and it may work for you too.
Review your bank reserves periodically to ensure you don’t run short on cash. It’s a good idea to segment your cash beyond a single account. An operational checking account may cover recurring expenses while a savings account may address emergencies. Adding a second “active savings account” allows deposits and withdrawals to be made to support near-term spending. This allows dollars to be set aside in advance for something specific but not commingled in the operational account. Having the right liquidity supports spending, ad hoc purchases, and avoiding debt.
Speaking of debt, do your best to minimize this to the greatest extent possible. It’s hard to be an investor when you are financing debt payments from cash flow each month. Debt provides leverage, leverage is sexy, but at some point that appeal may wear off. With interest rates reaching levels we haven’t seen in 20+ years; it makes sense to have a plan and prioritize how debt is structured. Once debt is paid off, consider redirecting prior payments towards cash reserves to provide additional liquidity and room for error. Accessible cash is boring right up to the point that it’s a necessity for a transaction and having more choices.
Automation is the single best AI solution in managing cash flows, savings, and investments. Establishing systematic money movements via your bank account/s allows the right dollars to be applied with purpose. Refilling active cash reserves, adding to after-tax investments, and paying off the credit card each month are several examples. When you don’t have to “think about it,” you create time which may be applied to other strategic decisions. Periodically check in on what’s going where and ask yourself if you are happy about it.
So, how do you spend your money? Using a debit or credit card, writing checks, apps, old-fashioned cash, or a combination of the above? There are no right or wrong answers but stick with a system that works for you. Spending is personal. Your financial plumbing system is a combination of automated money movements while managing everyday spending. Having a system allows for more freedom and less worry. When every account serves a purpose there’s no need for mental accounting which can be tough on the brain. This also ensures spending for fun, both on yourself and with friends and family. You can still spend and splurge today while saving and investing for tomorrow.
Take a minute to reflect on the points above. Cash reserves, minimizing debts, automation, and spending with purpose, nothing yet mentioned about investing or investments. IMO you cannot be a successful long-term investor until these points are addressed. Of course, anyone can invest without this foundation, but markets are cyclical and fickle. They attempt to disappoint investors often at the worst time. When you haven’t assessed cash reserves, spending, or know where your dollars go, things may get uncomfortable. If you need cash, often you’re left with liquidating investments earlier than planned or taking on debt.
Successful investors recognize this and are consistently acting on a plan. They avoid reacting whenever possible and review their financials twice a year or as necessary. This avoids surprises and allows cash flow to be the foundation of a plan. This also supports sustainable spending and having room for opportunities as life plays out.
In addition to planning, patience, discipline, and a good temperament may go a long way. Often our behavior can get the best of us which may limit our future wealth. Volatility is company price movements zigging and zagging and shouldn’t be feared as portrayed. It’s counter-intuitive when the skies are dark to continue investing. Human nature is a flawed investor as it often becomes difficult to sit still in contracting markets.
Those who remain committed to their plan are rewarded long term with the ability of their spending to keep pace with the rising cost of life. This reward arrives slowly but is more relevant today given the higher costs of just about everything. Focus on inputs, having a process and checking in periodically on your routine. Enjoy what you have and go live your life.
Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Flowerstone Financial are not affiliated.