Balance: Budget and Investments
By Gary Silverman, CFP®
This week we conclude looking at surviving the next financial crisis. The theme has been to be prepared by having money set aside and to have a backup to that in the form of savings. The problem is that many people stare at my words and ask how the heck they are supposed to have an emergency fund? How are they to have a car fund to raid if needed? They have a hard time just having enough money to keep a positive balance in the checking account. Others are in worse shape because even if they do have extra cash, they are looking at credit card debt that is growing every month.
This is tough. Unfortunately, if you are waiting on hearing about a quick and painless way to get to where you want to go, you’ll be disappointed. Instead (as you’ve heard from me in the past) you need to start with a budget. Yes; I hear your sighs.
Now, some of you never have to run a budget. You naturally save in advance for things, seem never to go into debt, and are progressing well with your retirement savings. But for most people that is not the case. To be ready for the next financial crisis you must budget for it (think emergency fund), budget to pay off the credit cards, budget for known future spending needs (cars, appliances, etc.), budget for college, and budget for retirement.
Budgeting—figuring out your current spending and then figuring out how to modify it to satisfy your goals—is the only way I know how to do this. Most don’t find it fun. That doesn’t make it less important.
I won’t go into the process here, as I’ve done that several times in the past, and there are a plethora of helpful calculators online (including a free service on our website: http://PersonalMoneyPlanning.com/click-explore-your-money).
One last discussion before I put an end to this...During past financial crises, many people found that even if they had an emergency fund and savings they had to dig into their investments (IRAs, 401(k)s, etc.) to make ends meet. The advisability of doing so is questionable, but here’s another reason to rethink this: Quite a few people go big with their investments, putting all their money in a few hot companies or otherwise have most of their investments in stocks.
You can see how this can become problematic If you have to pull money from your investments to live during a financial crisis; it’s likely the stock market is down when you have to do it. That’s why, in addition to many other reasons, having all your investments in one investment or one type can be a problem. Consider that when you build your investment allocation plans.
I hope you never hit bottom due to a financial crisis and I hope some of the lessons over the last few months will help keep that from happening.
Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing.