We’ve been exploring financial fitness over the last few weeks, and taking a look at the three main areas that affect your financial wellness – what you earn, what you spend, and what you save. First, we covered different approaches to income and how to align your goals with what you’re bringing in. Then, we talked about taking an honest look at how and where you’re spending your money. Today, we’re going to explore our final aspect of financial health – what you save.
Take a look back at those goals you wrote down last week. Are you saving toward them? How are you doing that? Now, your goals may not be socking away a lot for retirement or paying for your kids’ college in full. I get that. Other goals are important too, and please, don’t be afraid to share them with us in your next quarterly meeting, or in your initial planning meeting if you’re not working with us yet. Some people are embarrassed that retirement and college aren’t their main goals, or that there’s something else they’d rather do with their money. I’ll say the same thing here that I said about spending – this is a judgment-free zone. If you’re one of those people not making the same financial decisions as those around you and you feel like the odd man out, take heart. I can assure you that most people who do things the “traditional” way tend to be more vocal than those who don’t. And, those who march to their own drummers in making financial decisions aren’t wrong; they’re just wired differently.
I’ll admit that, a few years into my career, this drove me crazy. But now I know that it’s all just part of the wonderful differences we all have. Financial matters aren’t always black and white. One question I often get about savings goals is whether they ever need to be adjusted. The simple answer is yes, but I’m not going to just tell you to save more-more-more like you’re probably thinking. One reason I always ask how much is in your checking and savings accounts during planning meetings is to decipher your current pattern of spending and saving.
For example, maybe we decided that $25,000 is a good amount for your emergency fund, and you typically keep about $5,000 in checking. If we’re on a call and you tell us that your checking account suddenly has a $75,000 balance and your emergency fund has doubled to $50,000, I’m going to ask what’s up, because something has clearly happened. Why are you suddenly hoarding cash? Maybe it’s as simple as a good year at work that resulted in a nice bonus, or you came into an inheritance or sold some property. Just as often we hear that the client is worried about keeping a job as the company has been in the midst of layoffs, they’re saving for a kitchen remodel, or they need a new car and don’t know how much it will cost, even though they’ve never spent more than $50,000 on a car.
In each of these scenarios, there’s an event with an unknown cost. I know, as a financial planner, that when people are unsure, they tend to lock down and freeze up. I also know that you only have one shot at saving for your retirement goals, and I don’t want to see cash remain idle when it could be working as hard for you as you worked to earn it. In these cases, we make a mental note that it’s okay to carry a higher cash balance for a while, as long as you don’t let indecision turn a few months of idling cash into a few years. Lots of money gets thrown away by indecision.
Of course, when it comes to saving it is best to start out with that fundamental but often overlooked emergency fund. How much to save in an emergency fund is one of the most common questions we get, and the answer is simple: it depends. Are you a W2 employee with regular, reliable income, or are you a contract worker? Is your job seasonal? If you’re in an “eat what you kill” profession, or self-employed, you’ll need more to tide you through the lean times. Whatever your “sleep at night” number is, we’ll help you find it and work towards it.
I personally believe that everyone should automate as much as possible so that saving feels like any other monthly bill. The best savings strategies are built on an out-of-sight, out-of-mind, philosophy. Automating that goal takes away the monthly budgetary constraints that prevent that check from being written. If you are self-employed or in an “eat-what-you-kill” sales job that makes a fixed monthly amount harder to stick to, you have the best of both worlds. You often have the ability to make as much as you want, but I also know that many people in this situation often reward themselves handsomely and there isn’t much leftover to save.
I suggest, as many of you have done, that you intentionally and deliberately write down how much you want to save each year, and share that with us (or ask us to tell you how much you need to save and we’ll share that with you!). We’ll then put dates to those numbers and our team will hold you accountable with a phone call when it’s time to write the check. And then we’ll leave you alone! I’m already doing this with many of you, as often a simple phone call is the best accountability.
I recently shared a strategy I used when I first started saving: Once I hit my emergency fund goal, I kept socking money into the account each month. Then, at the end of the year, if it was still over my target balance, I’d take the surplus and go on vacation. Of course if you’re saving a for a new car or a second home or want to buy those fancy shoes, you can fill in the blank with how you spend that surplus – or decide to let it keep building. Some years you’ll have that excess, and some years your car and your HVAC will die at the exact same moment. My point is, once your financial cushion is established, don’t be afraid to have a little fun or put money towards a more frivolous goal when life hasn’t thrown you any recent curve balls.
Now you’re thinking, “Dave, when I wrote down all those things I’d spend money on if money were no object, an emergency fund wasn’t on the list.” I know. Sorry. But we have to cover the basics first. Not having a safety net in place to cover life’s “what-ifs” creates financial stress, especially when one of those “what-ifs” actually occurs, which it will.
If you have any questions about saving or what emergency fund balance would help you sleep at night, please, give us a call. We’re always here to help.
Article by David Smyth, Senior Partner at Family Financial Partners — a financial services firm in Lexington, Kentucky.
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