Under no circumstances would you plan to make an investment where the loss could equal the entire amount. For this reason, you need to have an insurance plan, loss protection strategy and exit plan in place for every investment. It is not prudent to assume that because historically something has increased in value over the long-term that history will repeat itself. Always make a personal decision and implement a plan for when, how and why you will sell your investment.
Why? While there are no guarantees, if your only plan is to hold for the long-term, you are sure to either lose money or lose sleep at some point during the life of the investment. When you decide how much you can comfortably risk losing, you maintain control over the process and confidence in your overall financial situation.
Are you focused on your net worth or your income and expenses? If you are focused on income producing assets, your net worth will take care of itself if you also keep an eye on expenses. Your plan is to develop assets that provide income; to leverage any debt to increase your income producing assets; to maintain control over your expenses so you can build these income-producing assets. Your plan is not to build a net worth that needs to be supported by your income. Your plan is not to focus on the difference between your income and expenses. Your plan is to build a net worth that produces ongoing income.
Why? Increasing your income will increase your net worth, which will increase your income, which will increase your net worth, etc. Income and net worth are connected and if you miss this connection, then there will be a disconnect between current spending and overall financial well-being and between accumulated assets, net worth and day-to-day living.
To focus on accumulating a large sum of money so you can withdraw it later will create stress. A more effective and empowering focus is to consider the purpose of the accumulated funds. For example, if you are working to set aside a sum of money (say $1 million) to support yourself when you leave work (i.e. when you retire) this number is not a number most people relate to. If you instead, focus on creating $5000 per month so you can leave work, it’s a more relatable, everyday number.
How do you figure out what this number is? Start with your ideal budget for your ideal lifestyle then work backwards from that figure. Stay focused on that monthly income number, rather than the bigger, off-in-the-distance number that doesn’t relate to day-to-day financial activities.
Not all debt is bad. When you distinguish between credit used to fund the purchase of something that will increase your wealth and debit created for disposable items, you are empowering yourself to make informed financial decisions.
Why is referring to credit use as “bad” keeping you locked in debt? Judgments like this will translate back to yourself and you will end up feeling like you are a bad person with no discipline or self-control. This sort of language and self-talk will end up creating a self-fulfilling prophecy – unless you can learn to turn your view around and use the debt as an opportunity to reflect on past expenditures you have made. Things to consider are: Why was the expenditure made? How much was spent? Over what time period were the expenditures made? What can you do about it? And, at the same time, always show gratitude for all the enjoyment you have received from the items and experiences that were purchased on credit and have created the debt. Look for ways to turn the debt into credit that will up your financial position.
Understanding the technical aspects of financial planning, financial products, financial markets, economic indicators and taxes, while part of financial literacy, is not where you start your financial education. If you are not interested in financial matters, or do not have the time to learn them, you do not need to know these things in order to be in control and realize financial success.
What do you need to know? What do you have? When does it need your attention? How are you going to monitor it? Why do you have it? Where will you monitor it? When and how will you get rid of it? And remember to relate all the information you get back to your personal values and goals. These types of questions will be more valuable than trying to cram the technical knowledge of your advisor into a short education on the product
Cluing in to Debt: A judgment that says that consumer debt is bad will not inspire change or motivate you to reduce it. While this is certainly the desired outcome, very few people are motivated to move away from something. We are all far more motivated to move towards something that inspires us. When looking at your debt such as your credit card debt or consolidated loans, these can provide valuable clues about the income of your desired lifestyle.
How? By totaling your consumer debt and dividing it by the approximate number of months you took to accumulate it, you will have a number that represents the cost of your real lifestyle. You then have three choices: increase your income by that amount and more, decrease your expenses by that amount, or a combination of both.
How can you reduce fraud risk & increase return potential without stressing about money? For every single financial transaction, write in your own words your expectations and understanding of the product, strategy or investment. This simple letter of understanding will assist you in communicating with your advisor helping you with the transaction; it will help you remember details later on; and it will help anyone who might need to help you with your financial matters if you weren’t able to. If you can have the advisor sign the document as well, even better, but understand this is not a legal document; it is for clarity of communication and understanding only.
Why take the time when a letter of understanding isn’t a legal document? First, by writing out your letter of understanding you, will ensure that you and your advisor are on the same page as far as communicating your needs and the product’s ability to fulfill that need. Second, for future reference, your reasons and details are not as clear after several years have passed as they are when you first purchase the financial product. The letter of understanding is a perfect summary of your expectations at the time of purchase. Third, if someone else is required to handle your financial affairs, they will understand what you have and why. For estate purposes, or for medical reasons, a letter of understanding can be an invaluable tool – to be kept with your record of affairs – that your executor, power of attorney or next of kin will use to process your estate.
Substitute the words “financial independence” whenever you see the word “retirement.” Retirement is not something you do at a certain age; it is not another life; it is something that happens when you are financially independent and can choose whether or not you go to work each day.
Why? As you see or hear the word retirement, you will start to consciously make the substitution of words. This will raise your awareness of the issue as well as work towards getting you to re-think what it will take to be able to leave the workforce. Will it really take reaching a certain age; achieving a certain amount of money saved; or will it take the ability to have sufficient income to cover your expenses in the lifestyle you want to live. When you are able to leave work with the income you need, you will be financially independent. Start planning to be financially independent – not retired
So much of personal finance is approached from a vertical perspective: accumulation of a pool of assets. This approach requires decisions that emphasize rate of return, amount saved, fees, taxes and minimizing expenses so there is more money to accumulate. This focus essentially says stockpile a mountain of ‘gold’ for the future – be careful when you get there because now it is all you have and you ‘cannot afford to lose it’. Unfortunately, with this approach, there is always an underlying fear of not having enough or of running out. Because the accumulation is for a date off in the distant future, there is a disconnect to basic human nature, which places more importance on things that are immediate and tangible.
What is the most effective angle for personal financial planning then? It is simply a 90 degree shift to a horizontal view. This approach will connect current income and expenses to ongoing income and expenses that cover a lifetime. It is a subtle difference with a significant impact in your overall thinking. Every financial decision, whether it’s to spend money on necessities today, or making an investment or lending decision with future implications, will connect to an immediately tangible and relatable number – the monthly income you currently use and the monthly income you require to support your lifestyle in the future.
A simple notebook and pen is the best financial planning and tax management tool you can have. With every single purchase or financial transaction, make a note of what you bought and its purpose. For tax purposes, it is far less stressful to take ten seconds at the time of purchase to write on your receipt than it is to try to remember the details when you are preparing your tax information.
And, when you have questions about terms, strategies, and other financial matters, you can record them so you can find someone or someplace to have them answered later. You can also use your notebook to write details about items you have seen while shopping and ideas you have that can be explored for possible income generating possibilities.
