Did you have a chance to start Week 1 - Cleaning up Spending and Saving? There’s still time to get going!
Week Two - Organizing Your Financial Wardrobe
For Week 2, we are going to organize your financial wardrobe, shelf by shelf.
In our regular closets, before we decide what clothes, shoes, and accessories to keep, we need a wardrobe strategy! Companies like Stitchfix.com bring “personal styling for everybody”. Well, I’m going to bring “personal financial styling” to your financial wardrobe! It will be tailored to your needs. Here we go…
Start with your wardrobe essentials.
Let’s begin with the basics on the closest, easiest to access shelf. No worries about whether these items will be in style, or come back later. They always hold their value.
I’m talking about cash and liquidity. Savings / checking accounts, money-market funds, short-term bank CDs.
Why start here? Well, as John Lennon said, “life is what happens while you are busy making other plans”, and cash and liquidity is the financial answer to getting through difficult times. The loss of a job, an unforeseen expense, or a medical emergency.
While the goal is to have a shelf holding at least three to six months of non-discretionary (housing, utilities, food, health care, etc.) expenses, start with what you can. Building cash reserves, even a little at time, is a great first step.
Here are some other drawers that may hold quick access to cash, in addition to your rainy day shelf.
- A home equity loan. Get it set up and in place before you need it.
- A margin loan against your brokerage account. Not to trade stocks or bonds “on margin”, but just to have quick access to funds. A short-term loan to yourself.
- Borrowing against your 401(k) plan. Have a plan to repay yourself.
The time to think about where you will get cash in an emergency is now.
Next up – Organize your own financial style
Now that you’ve tackled the basics, let’s move on to the shelves that define your own personal financial style:
- The investment account shelf: your brokerage or mutual fund investment accounts
- The retirement account shelf: your 401(k)s or similar work-based retirement accounts, along with IRAs and Roth IRAs.
- The “other” shelf: investments in private partnerships, real estate, and other less liquid assets.
Add up the three shelves. Do you know the total amount?
How about the mix of cash, stocks, bonds, and “other”? That’s your asset allocation. It can range from conservative to aggressive. Over time, some assets will be in fashion, and some out of fashion – but will come back over time.
It should be a mix tailored to your needs, and those needs change over time.
Is your allocation still appropriate and in line with your time horizon, risk tolerance, and need for liquidity? Down markets are a good time to determine the “pain” you are willing to handle.
Like an unorganized closet that contains a little bit of everything, we often see portfolios of mutual funds, stocks and bonds that have been acquired over time, without any real strategy. Certainly not tailored to someone’s needs.
If your asset allocation does not meet your needs, have a plan to make the change.
Avoid this fashion “don’t” – too much debt
The last thing shelf I want to touch on is the one way up high and in the back. The one that holds your least favorite item – debt.
Too much debt in your financial closet is never in fashion. Let’s clean up that shelf too.
What’s on it? List all your debt obligations including:
- Credit cards
- Student loans
- Car payments
- Other loans
Keep track of the minimum payments and the due dates. You don’t want to incur late fees in addition to the interest. Look at the interest rates. Can you refinance or negotiate a lower rate? Come up with a plan to reduce higher interest loans first. Mortgage rates are low, consider consolidating your debt at a lower interest rate.
Seeing all your debt in one place can be stressful. However, it’s the first step in taking control and minimizing what you can.
Is Your Financial Closet Getting Cleaner?
Hopefully you feel good about your progress. Getting started is always the hardest part.
I look forward to sharing week 3 with you. Happy Cleaning!
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The author does not intend to provide investment, legal or tax advice as these materials are for general educational purposes only. Please consult your legal, tax or investment professional for advice on your particular situation. This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. It is not intended to be a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. Investing involves risk including the possible loss of principal. Past performance does not guarantee future results. Please refer to RRCM’s Form ADV Part 2 for additional disclosures regarding RRCM and its practices.