Part 3 of 4: Learning how to save, transferring risk, and three buckets
Previously, I focused on healthy attitudes about money in part one. In part two, I defined money as it relates to work, choosing a career that pays and budgeting. This article is focused on building wealth, surviving the threats to your financial life, and investing money appropriately for its intended use.
- Pay yourself first.
I feel as if I should put quotation marks around this entire lesson because this concept was ingrained by my parents early and often. They would say something like: For your entire adult life, there will be a long line of others (people and places) with their hand out waiting to be paid: the grocery store, electric utility, gas station, bank, restaurant, government, and the list goes on and on. If you do not put yourself on the top of that list, your hard work and effort will go unrewarded. The only sign that you and all your labor are of value is if you can keep something to show for it. Don’t get me wrong — your work can be meaningful even if you don’t save a penny, but it’s meaningful for someone else, like the customer, patient, or student.
Practically speaking, there are simple ways to accomplish this goal. If your employer or business has a retirement plan option, such as a 401(k) or SIMPLE IRA, invest those dollars first before they hit your bank. If that option does not exist, then you can auto deposit a portion of your pay to a savings or investment account; then, allow the balance of your paycheck to go to your spending account to pay everyone else.
Every January, my wife and I discuss our church pledge and other charitable giving; then, make our commitments. That is our way of loving God and our neighbors as ourselves. In my very first job with a real paycheck, I signed up for 15 percent automatic deductions because I never wanted to feel like I missed it my spending account. If you are just starting this habit, then you may need to start with a lower amount, but with each raise or promotion, you should bump up your savings rate. Ultimately, my parents advocated that work was a worthy endeavor and that paying yourself first was the only way to be truly compensated.
- Manage for consequences if, not chances of.
According to FEMA U.S. Fire Administration, in 2010, .317 percent of households experienced a fire. This may seem like low odds, but this translates to 362,100 residential fires and 362,100 families suddenly homeless. This could be you. The advice here is to understand that you must prepare for the consequences of a high-risk event — even if the chances of it occurring are low.
Personally, I have seen the value of insurance in my life when I was diagnosed with leukemia in my 30s. Insurance companies exist to step in after such events and provide the resources to help rebuild and recover. Today, we use insurance to cover risks like a house fire, auto accident, loss of income, illness or disability, and even litigation. In our practice, we discuss these risks and others, while recognizing that even rolling out of bed in the morning has its risks. There are some risks we knowingly take because we can afford the consequences and others we manage with the help of insurance when we cannot afford to self-insure.
- Put your money in the right “bucket.”
Whether you are saving your first dollar or your net worth is in the multi-millions, everyone should understand the simple, time-tested concept of the “Three Money Buckets” that my parents taught.
Bucket one is your emergency and short-term goal bucket. At a minimum, it should cover three to six months of household expenses, and can be used on significant unexpected expenses like a job loss, health surprise, major car or home repairs, etc. This money is invested with safety of principal and liquidity in mind.
Bucket two is for nearer-term goals. Its use is quite undefined, depending on the individual’s goals, such as a vacation home, new business venture, or other ideas. The point is that these are goals that are likely to happen in three to eight years. Typically, balancing growth and safety is the investment goal.
Bucket three is money that is to be used later in life. Some people might refer to that time as retirement, but I prefer to call it financial freedom. Once bucket one is full, then buckets two and three can receive significant attention. Ultimately, my advice is to seek out a qualified financial advisor to develop a unique plan for your family that will adjust to life’s curveballs and address each bucket and your individual goals.
Any opinions are those of the author, and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James & Associates, Inc., Member New York Stock Exchange/SIPC
In the next issue of RGVision, planning for the successful hatching of your nest egg.
LESSONS FROM MY PARENTS
Have your questions ready for Bill, John, and Audrey Martin in their third Facebook Live event via @rgvisionmagazine at noon Tuesday, Jan. 7.