Once you start a family, building a sound financial future becomes paramount. Forget just looking out for #1; you now have to be prepared financially to afford a home and college for your children (should they choose that path), as well as retirement and any unforeseen emergencies that could significantly affect your ability to bankroll all of the above.
This can feel overwhelming, especially when the concept of “saving money” presents more than a few possibilities.
- When should I start saving?
- What types of saving accounts will be most advantageous to my family?
- How much should I be setting aside for retirement?
- How important is it to have auto/home/disability and life insurance?
Seeking the guidance of a “macro” advisor who may help you see the big picture in regard to your family’s financial future—with an initial goal of no additional out-of-pocket outlay—is a great starting point.
Read on for my “Four Simple Tips That May Help You Build a Better Financial Future.”
It’s human nature to not want to think about all of the bad things that could possibly happen in your lifetime, but it’s smart financial planning to acknowledge that they could occur. Accidents are just that—accidental—and there is no way for you to see them coming, whether it’s a fire at home, a car collision causing injury or death or something else. So no matter if you’re a glass-half-full or half-empty type of person, you’d be smart to make sure your “glass” is topped off with a suitable amount of insurance.
Another tendency of human nature, unfortunately, is to spend the least amount of money on items that don’t provide an immediate return, which is why you may be scrimping on your insurance policies to keep premiums low. When considering insurance policies, ask yourself,
“If insurance was free, what would I want?
Start here, and work your way down in terms of protection, suitability and affordability. The same goes for life and disability insurance. If your house or car was destroyed by fire or an accident—or you or your spouse was killed or disabled, God forbid—you would want full replacement value, for both your possessions and income lost, in the case of death or disability. Another great question to ask yourself,
“Would your financial plan still work if you got sued, died, became disabled or lived too long?”
There may be ways to improve protection without an unaffordable premium, including higher deductible plans and add-ons, such as general liability/umbrella policies. Seek out a financial representative, such as myself, who may coordinate a strategy that increases your protection without sacrificing your ability to reach your full wealth potential. If a financial plan can be engineered with no additional out-of-pocket outlay, why wouldn’t you want the maximum protection while still being positioned to have the ability to reach your full wealth potential with lower risk as the goal? This is an objective we strive for.
Now that we’ve discussed the importance of maximizing protection, it’s time to address the other two strategies that round out the foundation of a strong financial future: saving 15 percent of your income and establishing an emergency fund equal to a half-year salary. An emergency fund enables your family to rebound from unexpected life event expenses and enables you to avoid going into debt.
Why Save 15 Percent?
While this may seem like a lofty goal, it’s one worth striving for. That 15 percent isn’t just a pie-in-the-sky number—it’s designed to address the most common causes of money erosion. So, by saving 15 percent, you are accounting for:
- 3% to help overcome the cost of inflation;
- 3% to help address tax increases;
- 3% to help handle the costs of technological change;
- 3% for the costs of planned obsolescence
- 3% to accommodate unforeseen factors
How Do You Get There?
- Start saving early – once you land your first job
- Set aside 15 cents for every dollar earned
- Consolidate debt to increase cash flow
- Analyze monthly cash flow to pinpoint areas where you can reduce expenses
- Avoid cash flow-restricting mistakes, such as overpaying into retirement plans and choosing a 15-year mortgage
Where Should I Put My Savings?
Don’t be too concerned with obtaining high rates of return at this stage, as having liquidity may improve the overall rate of return within your plan, in and of itself.
Initial savings options include:
- Credit union
- Savings bonds
- Money market
- Cash value life insurance
Once you reach the half-year salary mark, any overflow can go to a blend of growth-oriented investments, such as:
- Employer-sponsored retirement plans
- Roth IRAs
- Permanent whole life cash value life insurance
- Mutual Funds
- Real Estate
If you’re lucky enough to have an employer who offers a retirement account with a matching program, take advantage of it by all means, but it may also be advantageous to make sure that your contribution is no more that seven percent of your gross income or maximum match.
If you evaluate your current tax bracket, along with your other income from assets, you may find that contributing any more than seven percent of your gross income may put you in a position to overpay in taxes throughout retirement.
If you are able to save the recommended 15 percent of your gross income, take seven percent of that to get your maximum match, and then put the remaining eight percent into an after-tax or tax-free retirement strategy using a combination of tax-friendly multiuse financial products.
When you overpay into retirement, your money is essentially tied up in a straight jacket until you reach retirement age. It’s best to keep your money fluid and working for you, within your control. An after-tax/tax-free strategy may be demonstrated with a financial representative trained in macroeconomics, such as myself.
When you’re making significant life decisions, it’s always important to look at the big picture—including all of the possible outcomes, negative and positive. In regard to money matters, when you make one financial decision, it will affect your finite amount of money supply and assets.
What is a Macro Manager?
A macro manager has the tools to demonstrate financial strategies that take into account how each affects your overall financial plan. Much like the conductor of an orchestra, who directs all of the musicians to attain the best sound and performance for the overall outcome, a macro manager works with you and your other advisors, such as an accountant or attorney, to produce a comprehensive, coherent, and holistic personal economic plan designed to potentially yield the best possible result. In contrast, many financial representatives operate as micro managers, trained by their agencies to sell financial products without the intent of simultaneously improving performance of all your other financial products. They tend to want to replace one product for another, promoting money working in isolation, rather than cooperatively with other products. These traditional financial representatives may also charge a hefty fee that unfortunately might not assure better performance. Remember how you want to avoid money value erosion in your investments? A fee is just another type of tax or eroding factor that takes away from your overall financial performance.
How Do I Find One?
Since a micro manager likely won’t advertise him or herself as such, this can be challenging. Watch for specific language. Avoid the financial representative who only asks about your needs and goals and relies on his/her opinion, rather than the facts and science behind the recommendation. Instead, look for someone who discusses your wants and dreams and has the tools to demonstrate and compare strategies.
Scott Karl is a licensed financial representative in Fresno, CA. Since 1994, he’s provided a variety of financial products for his clients, including long-term disability income, health plans, mutual funds, life and annuities, qualified plans, retirement plans, college education plans and legal services.