Today was an unprecedented day in the stock market. At one point the Dow Jones was down nearly 1,000 points (I can’t believe I am even writing that number).
I want to stress that the best thing to do is to remain focused on the things you can control, i.e. your savings rate, your asset allocation, your debt-to-income ratio, etc. You can not do anything about what the market does day to day, but you can do something about those things mentioned above. You are going to hear many “talking” heads on the radio and TV give various explanations for why things happened the way they did. However, the real question is how these events are going to affect you and the ones you love. We have a tendency to get lost in the stress of everyday life and we forget to make note of the blessings we have each day.
I am not telling you to be oblivious to what is going on in the world but that you need to work on the things you can do something about and let everything else take care of itself. It is important you do not overreact to short-term market events. During times like these it is important to remember the basics regarding your financial life:
- Live on less then you make
- Have $0 consumer debt
- Don’t buy more house then you can afford
- Pay as little in taxes as you are allowed
- Have proper cash and emergency reserves
- Save for the short-term and invest for the long-term
- Spend time with your family and those you love instead of watching the latest stock market charts.
As for the rest of it, take a deep breath and remember with me to control the things we can and let go of those things that are outside of our power.
One of the greatest risks that I see in a lot of people’s financial portfolios is that they do not have enough cash. My business serves a wide range of individuals and families and I get to review their financial life from an objective perspective. I have found some couples, who even after the market downturn in the fall of 2008, still have not learned the value of having “ready cash” and “emergency cash.” I think some people believe that an “emergency” will not happen to them so why should they keep so much in cash. My job as a financial planner is to recommend to them what I believe is in their best interest.
I am not against investing and taking risk. However, I am against investing and taking risk before you are ready. I do not care how young you are; if you do not have proper cash set aside in the event of an emergency you should not be investing in the stock market.
In my recommendations to clients, I follow a few basic principles that I learned from Bert Whitehead, the founder of the Alliance of Cambridge Advisors. First, if you are a W-2 employee, you should keep a minimum of 10% of your income in a interest-bearing savings account. I call this the “ready cash” account. If you are self-employed or retired you will want to keep a larger percentage of your income in “ready cash.” Next, I recommend you keep 2 times your “ready cash” inside of your 401k or Traditional IRA* invested inside of a money market or government-backed fund. However, if 20% of your mortgage balance is higher then 2 times your “ready cash” then you will want to set aside that amount instead. I know this may seem like a lot of cash but the best feeling your financial plan can offer you is security and if you know you have proper amounts of cash in your portfolio then you have the freedom to take appropriate risk in other areas of your investment portfolio.
*I can hear it already. You might be asking why I recommend to keep emergency cash inside of a 401k or Traditional IRA. Well, let’s just save the answer to that question for a later blog entry.
“Control the Things You Can” was written by Tedd Oyler, a member of the Alliance of Cambridge Advisors who practices in Saugatuck, Michigan. This article was originally published as the second part of a series on how to do a financial check-up.
The lament of the powerless goes something like this: “It doesn’t matter how hard I work–the bills just keep piling up; the stock market and the cost of living are killing me; the politicians are ruining everything.” You may have had these, or similar, thoughts before. This is sad, for it is unnecessary to feel like you have no control over your financial future.
Our information culture offers a range of financial data and “advice,” ostensibly to help you take control of your financial life. Perhaps you listen to daily (or even hourly) market reports.
Perhaps you are concerned that the Fed is changing interest rates.
Perhaps you care about the pundits’ predictions as to what the economy will do over the next quarter, or year, as if what they think matters. Perhaps you even read books on investing, and there are certainly enough of those. If we take seriously the notion that we can do something about our financial health, and if we acknowledge that money is but a tool that we can learn to master, then we are ready to look at what things we CAN control in our financial lives.
It looks like the IRS has finally put together some proposed recommendations for tax preparer continuing education and competency requirements. These requirements are for unenrolled tax preparers. If your tax preparer is an Enrolled Agent, CPA or attorney they are already required to fulfill similar requirements based of their professional status.
Check out the IRS proposed requirements at http://www.irs.gov/newsroom/article/0,,id=217781,00.html
What do you think of when you think of your greatest asset? You may think of your home, investment accounts, vehicles or a family heirloom. In reality, you have an asset that is far greater than any of the aforementioned items. The greatest asset you have is yourself and the ability you have to earn an income.
When I worked for a commission-based financial advising firm, we would lead with the first question above to begin the long-term disability sales process. We have insurance for all of these tangible assets (house, vehicles, etc) but many times we do not have any or we are completely ignoring the need to have insurance on our future income earnings. I want to look at this question a little differently now, though. I want to look at the “cap” you may be putting on your future income and future well-being at this very moment.
I work with many entrepreneurs and the successful ones have something in common. They realize that their income and ultimate success is contingent upon their ability to create something of value and then market that item or service so others will pay for it. I see a lot of people who have comfortable “jobs” working for someone else are putting a “cap” on their potential earnings. If you are working for someone else, you are allowing them to tell you what your value is to the company or organization. If you think you need a raise, what you are really saying is that your services are “undervalued.” I used to think I would only be able to make XX amount of dollars in my previous career. The thing I soon realized is that my self-esteem and the value I was giving myself was based on someone else telling me what I was worth. It was not until I looked at my situation objectively that I realized I could provide tremendous value to others and be compensated fairly for it.
Written By: Virginia Nolen, Author of the blog 1184 Square Feet of Bliss
freedom from danger, risk, etc.; safety.
freedom from care, anxiety, or doubt; well-founded confidence.
something that secures or makes safe; protection; defense.
freedom from financial cares
(courtesy of www.dictionary.com)
Financial security means to me freedom from the prospect of total financial ruin. It means that if my husband loses his job (us being a one income household and intending to stay that way), we’ll be okay until he finds another good one, even if that takes a year. Financial security means that I don’t have to worry whether or not all the bills will get paid this month. It means that I don’t stress about money. Financial security is a happy place! For me, it is knowing that without a doubt, barring a total breakdown of the American banking system, we’re going to be okay.