Back to Personal Finance Basics
I love to write about markets and the economy as I find this subject fascinating. However, with the world seemingly in turmoil, now is a good time to revisit some basics of personal financial planning. Part of our brains hardwiring is the need to do something when things feel out of control. Take these planning ideas and apply them to your situation. We cannot control the market or politics or world events so it’s a good idea to control the things you can control. After all, we have to plan for the things that are coming and could go wrong, in order to earn the luxury of investing for what can go right!
One of the first things that is easily controlled is keeping your debt in order. Many of the folks I speak with have pretty stern beliefs on the subject of debt. If “debt free” is the way for you, good. However, debt in and of itself is not bad. Many of the top companies in the world use debt (also known as “leverage”), even when they have loads of cash. There is an optimal form of leverage and not all debt is the same. One type of debt that should be kept at a minimum is consumer debt, this is credit cards and car loans. Things you consume. If possible, try keeping this to no more than 15-20% of your net income (take home pay).
The next step is to build a cash reserve. This is meant to cover your expenses if something unforeseen happens like a major repair or loss of a job. This prevents us from adding to our consumer debt to finance day to day living or even worse… tapping our retirement savings. Most financial pros suggest 3-6 months as a rule of thumb. Though, if 8 months allows you to then invest with confidence, do what feels right. A good financial advisor can help figure out what works for you.
Once we have debt under control and a war chest built, its time to plan for retirement. Depending on various factors, you likely want 80-100% of the income you live on now to continue with your lifestyle. Ways to keep on track include, paying yourself first. There are always things that pop up so try to commit to making retirement savings a top priority, somewhere in the 10% range is a good starting point. If this seems like a lot, it is ok to include employer matching, but as you go on and adjust to the new income level, try committing to increase your contribution just 1% a year. To keep things simple, focus on your company’s retirement plan first, IRAs, ROTH IRAs, etc are all great but most employers match your contributions and, in a sense, this is like getting a raise. Now that you’re rolling, try not to stop! People are living longer, and retirement can be costly so try to keep going through thick and thin and don’t touch your funds unless you absolutely have to!
When the time comes, make a smart decision about social security. There used to be many clever claiming strategies. Most of these have gone away due to tax code changes. Now it is often a balance between the bird in the hand idea of taking social security early, while you are in good health, versus deferring it. The benefits grow at a fixed rate up until age 70.
Finally, do some estate planning. Like a few of my lawyer friends say, everyone has an estate plan. If you don’t build our own, the state of Michigan does it for you. However, the state you live in may not direct things to where YOU want them to go. Do a little work with power of attorney, wills and perhaps a trust to ensure your assets go where you want them to and are used the way you prefer. In some instances, like your financial assets, beneficiaries can do this. When was the last time you reviewed the beneficiaries on your 401k, bank accounts and IRAS? This is a good place to start.
Hopefully, this refresher has you feeling good about your progress. If not, it may offer some areas for you to focus on. Making changes here and checking the boxes is a good way to control the financial aspects of your life you can and allow the market and economy, things you cannot control, to do as they will. Have thoughts or questions about where you stand or even about the things you cannot control? That is where we come in. Lets have a cup of coffee and do a retirement ready check!