With the start of 2021, many have written down their New Year's Resolutions and have begun to work towards them. Often, these Resolutions include some financial objectives. Here are three tips that we think are relatively easy to do and can go a long way to helping you meet your financial goals.
Know your Cash Flows
To simplify things - if the amount of money you bring in is higher than the amount of money you spend, you are cash flow positive. The amount of money you bring in is fairly easy to calculate - it is a combination of employment and investment income. The expenditures, on the other hand, are much more difficult to calculate. They are a combination of non-discretionary (essential spending like mortgage, food, etc.) and discretionary (books, hotel stays, etc.) spending. They could also be either one-time expenses (home renovation) or reoccurring (monthly Netflix subscription). The first step is to identify your costs and categorize them into those two buckets. If your spending is higher than your income, and you frequently dip into debt or your savings or investment accounts, you should identify anything in your spending habits that need to be trimmed. If your income is higher than your costs, you can create a monthly, or quarterly, or annual savings goal and set up a reoccurring deposit into an account of your choosing. Your savings could be for retirement, a post-pandemic vacation, or a home upgrade. By knowing where you spend your money and how much you are saving, you can make significant headway into meeting your financial goals.
Create Emergency Savings
The theme of 2020 was to "Expect the Unexpected." Every week it felt that there was a once in a lifetime event. That is why everyone should have an emergency savings account. In determining your cash flows, you should identify the crucial things you spend your money on - your non-discretionary spending - and see how much you need to cover 6-12 months of it. For example, if your mortgage + grocery + utility bills equal to $7,500 a month, you should look to have at least $45,000 in an emergency savings account, which should be held in cash or a money market fund. The amount of money to keep in emergency savings is dependent on your risk level, but monthly non-discretionary spending x 6 months is a good rule to start. Even before contributing to retirement accounts, or investing in the stock market, it's best to have emergency savings in place. If anything were to happen, and you needed to pull money out of your retirement accounts before your retirement age, you would be hit with a tax penalty. If you invested your emergency savings and there was a sharp stock market correction, and you lost your job, like what happened in March 2020, you would not have as much money as you thought you would.
Have Fun When You Can
If you have a good grasp on your cash flows and you have an emergency savings account, then it's important to use your money to have fun when you can. This quote is from a "NewRetirement" article:
"According to a 2015 HSBC survey, American retirees expect to leave an average inheritance of almost $177,000 to their heirs. The Survey of Consumer Finances (SCF), reported that median inheritance was $69,000 (the average was $707,291). For trust funds, that median wealth transfer was way, way higher — $285,000 (and the average was $4,062,918)."
To frame this in a different light - on average, a person's assets outgrow their lives. We spend a lot of time worrying about whether we'll have enough assets in retirement, and rightfully so. However, data shows that we'll end up passing a significant amount of money to the next generation. Therefore, it's important to remember that we shouldn't always worry about saving and growing our retirement assets. Instead, we should be finding the balance between saving and spending that helps us meet our financial goals, of which "having fun" should be one of them. These goals include "purchasing a vacation home" or "going on a six-month-long trip to Italy. They can even as simple as "upgrading my car to a Tesla." If done holistically, incorporating "having fun" into a financial plan is doable, and we strongly encourage it.
If you're interested in learning more about how we've helped our clients work through these three tips, we'd love to talk to you. Shoot us an email, and we'll set up a time to chat!