Here are five steps to get you started on the road to financial fitness. You don’t have to do everything at once. Just get going. We believe that, as you move from one step to another, you’ll feel stronger—and closer to achieving your goals.
Resolution No. 1: Create a budget for life
Financially speaking, life can be viewed as a series of cash inflows and outflows. Saving and investing during your working years should hopefully lead to a rising net worth over time, enabling you to achieve many of life’s most important goals, like funding your retirement. Creating your own budget and net worth statement can help you build your road map and stay on track, even during tough times.
1. Create a budget.
Track your spending for at least 30 days.
Separate essential from non-essential expenses.
Put savings first, starting with high-priority goals like retirement.
Our retirement savings rule of thumb: Save 10–15% of pre-tax income starting in your 20s. Add 10% for every decade you delay.
2. Calculate your personal net worth annually.
It doesn’t have to be complicated. Make a list of your assets (what you own) and subtract your liabilities (what you owe) to determine your personal net worth.
While your net worth may temporarily decline during tough market periods, it should generally be rising during your earning years.
If you’re retired, you’ll want to plan a draw down strategy to make your money last as long as you do.
3. Identify your goals and create a plan to achieve them.
With your budget and net worth statement in hand, prioritize your goals. Give them a ranking, time frame and target savings rate.
Revisit your plan annually to check your progress.
4. Project the cost of near-term, must-have, big-ticket items.
Think tuition, property taxes and vital maintenance (e.g. the roof or major car repairs).
Treat that money as spent. Keep it in liquid, safe investments like FDIC-insured certificates of deposit.
5. Retired? Invest your living-expense money conservatively.
Consider keeping any money needed for the next 12 months in a liquid, relatively safe investment like short-term Certificates of Deposit.
Consider keeping another one or two years’ worth of spending laddered in short-term bonds as part of your portfolio’s fixed income allocation.
6. Prepare for emergencies.
If you aren’t yet retired, consider keeping at least three to six months’ worth of essential living expenses in liquid, relatively safe investments like savings accounts and short-term CD’s. That way, you can avoid having to sell when the market’s down or incurring penalties by withdrawing from tax-deferred accounts.
Resolution No. 2: Manage your debt
Debt is neither inherently good nor bad—it is simply a tool. For most people, some level of debt is a practical necessity. That said, problems arise when debt becomes the master of the borrower, not the other way around. Here’s how to stay in charge.
1. Keep your total debt load manageable.
Don’t confuse what you can borrow with what you should borrow. Keep the monthly costs of owning a home (principal, interest, taxes and insurance) to no more than 28% of your gross income. Your total debt service shouldn’t exceed 36% of your gross income.
Try to avoid borrowing to buy depreciating assets, such as cars.
Pay off, or at least lower, your credit card debt.
Consider consolidating your debt in a low-rate home equity loan or line of credit, which can be tax-deductible—but only if you can control the debt and not put your home equity at risk.
3. Match repayment terms to your time horizons.
Likely to move within five to seven years? Consider a shorter-maturity loan, as long as you keep your payments within your budget.
Don’t borrow assuming your home will automatically increase in value. Historically, long-term home appreciation has significantly lagged the total return of a diversified stock portfolio.
Resolution No. 3: Invest with a plan
Getting better investment results is a goal we all share. But investing is a means to an end, not an end unto itself. So stay focused on your goals. Create a plan that will help you stay disciplined in all kinds of markets. Follow it and adjust it as needed. Here’s how.
1. Focus first and foremost on your overall investment mix.
Plan a meeting with your Advisor to discuss your objectives and needs for the coming 3 months, 6 months, 1,3 and 5 years.
2. Consider taxes.
Place relatively tax-efficient investments in taxable accounts and relatively tax-inefficient investments in tax-advantaged accounts.
To the extent you can, use tax-advantaged accounts to rebalance and harvest losses in taxable accounts when practical.
Resolution No. 4: Prepare for the unexpected
Risk is a fact of life. Your financial life can be upended by all kinds of nasty surprises—an illness, job loss, disability, death, natural disasters or lawsuits. If you don’t have enough assets to self-insure against major risks, resolve to get your insurance in shape.
1. Protect against large medical expenses with health insurance.
Get a health care policy that matches your needs in areas such as coverage, deductibles, co-payments and choice of medical providers.
2. Purchase life insurance only if necessary.
Unless you have large liabilities that will continue after your death for which you can’t self-insure, you may not need life insurance.
Using costly insurance contracts as investment vehicles (like whole life and cash value policies) is usually inferior to purchasing low-cost, term life policies and investing the difference yourself.
Take advantage of the policy offered by your employer or trade organization, but secure outside coverage if the policy is not transferable or if you need additional life insurance.
3. Protect your earning power with long-term disability insurance.
The odds of becoming disabled are greater than dying young. If you can’t get adequate short- and long-term coverage through work, consider an individual policy.
4. Protect your physical assets with property-casualty insurance.
Check your homeowner’s and auto policies to make sure your coverage and deductibles are still right for you.
5. Obtain additional liability coverage if needed.
A personal liability “umbrella” policy is a cost-effective way to increase your liability coverage by $1 million or more.
Obtain business or professional liability insurance if needed, as umbrella policies don’t cover business-related liabilities.
6. Consider the pros and cons of long-term-care insurance.
About 59% of people over 65 don’t spend any time in a nursing home. The average stay for those who do is 2½ years.
Look for a policy that is guaranteed renewable with locked-in premium rates.
Find out such things as what type of care is covered (skilled nursing, custodial care, home-assisted living), eligibility criteria, benefit period, elimination period, maximum daily benefit, whether there is inflation coverage and how solid the insurer is.
Seek out independent sources of information such as your state insurance commissioner.
7. Create a disaster plan for your safety and peace of mind.
Review your homeowner’s or renter’s policy to see what’s covered and what’s not. Talk to your agent about flood or earthquake insurance if either is a concern for your area.
Keep an updated video inventory of valuable household items and possessions along with any professional appraisals and estimates of replacement values in a safe place away from your home (e.g. a safe-deposit box or with an out-of-town relative).
If you have to evacuate immediately, it’s a good idea to have copies of birth certificates, passports, wills, trust documents, records of home improvements and insurance policies in a small “evacuation box” (the fireproof, waterproof kind you can lock is best) that you can grab in a hurry on your way out the door. If you’re tech-savvy, consider scanning your important documents into a computer file you can store online or on a CD, along with a backup of your personal computer files (again, kept in a safe place away from your home).
Keep some petty cash on hand for emergencies. Your local ATM might be out of commission for quite some time. You don’t want to keep too much cash on hand, but enough to get by for a few days is a good idea. If you can’t get back to work for an extended period, having an emergency fund in your bank or brokerage accounts can help. A standby home equity line of credit you can tap in an emergency will also be handy.
Resolution No. 5: Protect your estate
Without an estate plan, the fate of your assets or minor children may be decided by attorneys, government bureaucrats and tax agencies. Taxes and attorneys’ fees can eat away at your estate, and delay the distribution of assets just when your heirs need them most. Here’s how to protect your estate—and your loved ones.
1. Update your will so your final wishes are fulfilled.
A will can provide for support and care of your dependents, and help you avoid the costs and delays associated with dying without one.
2. Coordinate asset titling with the rest of your estate plan.
The titling of your property and non-retirement accounts can affect the ultimate disposition and taxation of your assets.
Keep information on beneficiaries up-to-date to ensure the proceeds of life insurance policies and retirement accounts get to your heirs quickly, without having to pass through the probate process.
3. Have in place durable powers of attorney and health care.
In these documents, appoint trusted and competent confidants to make decisions on your behalf if you become incapacitated.
4. Consider creating a revocable living trust.
This is especially important if your estate is large and complex.
5. Take care of important estate documents.
Make sure a trusted and competent family member or close friend knows the location of your important estate documents.
Finally, remember you don’t have to do everything at once. Take one step at a time. Make some real progress on your journey.
