Thursday, August 24, 2017

Setting the Stage: How should we think about money in mid-life? 2

Welcome to 

Middle-aged Money Man 

a blog devoted to considering and choosing the wise money moves 
one needs to make between the ages of 35 to 55.

Setting the Stage:
How should we think about money in mid-life?

Cash. Income. Money. Savings. Wealth. These are words that financial professionals toss around quite often. And it seems that they use it differently than the average client.  A workable definition and a specific knowledge of how these words apply to you are very important.

This is especially true in mid-life…. from ages 35 to 55.  As stated before, my review of all of the blogs that are out there regarding money matters, it seems that most blogs focus on the bookends of life’s stages – beginning (millennials) and end (retirement and legacy planning).  But all of the good stuff happens in the middle.

If you are like me, I had no control over my money until my mid-30s.  I was the kid who got 2 credit cards in college, borrowed too much in student loans, spent impulsively on games and things of no worth, did not save anything, and wasted financial time in my 20s.  That was me.  I admit it.  So, turning 35 and then 40 were times of revolution in my life.  I had to grow up, develop some reasonable budget, buy a house, and more.

I spent my time digging out of consumer debt, disciplining myself to save for a down payment on a mortgage, prioritized my overall spending, and created a savings plan.  I did it! But it was painful…… and filled with setbacks.

So, here I am in my mid-40s. I like to think that I know the real value of a dollar now. All of those pieces of advice from my grandfather about money seem to get truer every week.  He grew up in the Depression and was faced with very hard financial choices early in his life. He had children in his early 20s. He came to understand that just enough money means survival, but generating more and additional income meant freedom.

In all of the areas of financial planning, few if any exert such influence as Cash.  Cold, hard cash. Liquid cash (ability to access it quickly).  Cash savings. Emergency cash.  Obtaining adequate cash for living expenses is one of our first tasks in adult life. Developing the discipline to delay gratification so that we can save for the future is another skill we must develop.  The idea of having adequate cash on hand, earning reasonable interest, and being prepared for unforeseen events are life skills that we (hopefully) develop in our 30s.

So, in setting the stage for all of blogs hereafter, I want to share some cash principles that I value. I want to emphasize the importance, the need, for always maintaining a sufficient amount of money on hand. Here they are:

1.  Cash is King, and Impulse Control is Queen:  There is a comfort in knowing on some level that you have adequate cash.  For me, of all the assets I can own, cash is number one.  Cash is a tool that makes so many things possible.  Before you invest in anything, build up cash reserves into a meaningful savings account and emergency funds account.  Determining to build cash reserves, and doing it, is a hallmark of responsible financial management. Before debt payoff, before investing, before fun….. save.

2.  Cash should be kept in a Savings Account for specific purposes: Savings account are different than and separate from emergency funds, education funds, down payment funds, and so on.  A savings account can be sub-divided into vacation funds, travel funds, furniture funds, bicycle funds, or whatever.  In general, a savings account is for specific things or experiences.  Of course, there can also be part of the savings account set aside just as miscellaneous money, to have on hand.  I recommend a minimum of three bank accounts: checking, savings, and emergency. The self-discipline to keep each account separate and funded is a sure sign of great money management.

3.  Cash should be held in a separate account as Emergency Funds:  One item that clients often resist with the planning process is the establishment of a separate account for emergency funds.  Some clients want to choose to mix these funds together with savings.  I recommend that you resist that temptation.  In fact, I recommend that you start an account for emergency funds at a separate financial institution (bank, credit union, etc.).  The idea behind this is to have a cash account that is accessible same day, but is almost never thought of or seen.  This account is for truly unforeseen, unexpected expenses such as a medical event, broken washing machine, need for a speedy repair to your home, or a surprising bill of another kind.  Refuse to live by the credit card or to feel that you must drain your checking account for these types of events.  Remember, emergency funds can be built over time, starting low and ending at a specific number.  Prepare for that which cannot be prepared for.

4.  Cash Reserves are Tricky; you probably need to have more than you think you do:  When I ask clients how much they need in savings and emergency funds, I get big variance in the answers.  Some believe that they should maintain about 1 month of emergency funds while others believe it is more like 6 months.  The numbers are even more disparate with savings accounts.  I hear numbers from $1000 to $50,000.  Whatever the number, there are a few considerations in determining how much is enough.  Some of these include income level, monthly living expenses, health, condition of car and house, ownership of a business, and much more.  In choosing the number that is right for you, let me suggest two conditions.  First, choose to believe that it is more than the number you identify.  Add 20% to that number. That‘s closer to your number.  Second, set a minimum for whatever number you choose.  For emergency funds, I would recommend an absolute minimum of $2500.  For savings accounts, I would recommend a minimum of $2000. With added income and risk, just add to the minimum appropriately.

5.  Cash allows for Opportunity Investing:  When we have achieved a certain place in life, many of us start looking for other types of investments, additional streams of income, side jobs, and the like.  It could be that we begin considering rental property real estate or beginning a home-based business.  Cash reserves allow us more freedom and an increased level of opportunity.

6.  Cash is a type of Counterbalance:  Cash can be a type of anchor.  When I keep cash levels adequate, it is easier to endure market downturns, job loss, income interruption, medical emergencies, car problems, and the general stress of every day.  I feel like my supply chain is full.  Life seems more manageable.  When I invest every dollar I have, a market downturn may lead to panic.  But, when I maintain a proper balance in cash, I am more able to maintain a long-term view of the markets.  If one member of a couple loses his/her job or suffers an injury, cash reserves come to the rescue.  For whatever life brings your way, cash can be one way in which you keep an even keel.

7.  Cash Control builds Confidence:  I’ll go ahead and say it…. I feel more confident when I have money in the bank…. when I am not living paycheck to paycheck.  I carry myself differently when I have money.  I am more assertive, happier, able to relax, and have more fun when I keep adequate cash in checking, savings, and emergency accounts.  That confidence leads me to feeling that I am in more control of my money, that life is gonna be better.  It produces a calm, solid knowledge that I can do tomorrow… and the next day.

8.  Cash offers Flexibility:  Some of our clients really, really want to pay off debt as soon as possible.  That’s great. But, some get too aggressive in their debt or mortgage payoff plan and become Cash Poor.  A few of our clients over-contribute to their 401k or IRA instead of maintaining an adequate amount of cash on hand.  I cannot overstate the need for excess cash……. because life is unpredictable.  Before you know it, dad needs a crown for his molar, mom needs to repair the car, and kids… (well we all know that expenses with kids are innumerable…haha).  Be wary of trying to pay off debt so quickly that you sacrifice proper cash management and reserves.

9.  Cash just Feels Good:  I am a very spiritual person, believing that security and happiness do not start with or grow from money.  BUT, there is a feeling of comfort and self-respect that grows from being able to build cash reserves.  Having an emergency fund of 2-3 months just Feels Good.  Knowing that you can pay for a future vacation with cash just Feels Good.  If your refrigerator breaks, it is very nice to know that all you need to do is write a check for a new one (instead of going deeper into debt).  Money may not buy happiness, but it does seem to put a down payment on peace of mind.

There is never a need to feel ashamed of not having sufficient cash.  I would never recommend that a person ties their sense of worth and meaning to how much cash they possess.  However, life’s stresses and unforeseen events and costs are going to happen.  Usually, when we least expect them.  Start now to build up cash reserves.  If you use 100% of your income for expenses and debt repayment, consider adding another stream of income or negotiating with creditors for a slightly lower cost in order to save something.

So, I hope that this blog article has been useful to you. My team’s goal in working with clients through the financial planning process is to build solid foundations, save wisely, invest profitably, and rest east.  Until next time…… Be Blessed.

Richard Barbeerichard@sdp-planning.com9724 Kingston Pike #701Knoxville, TN  37922865-357-7370 

These are the opinions of Richard Barbee and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. None of the above should be construed as individual legal, investment, or tax advice. Please consult with a legal, investment, or tax professional regarding your unique circumstances. Neither Richard Barbee nor Cambridge can offer legal advice.

Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Slate, Disharoon, Parrish and Associates, LLC are not affiliated.

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