Attention: You are now leaving the Wintrust website.
by James Brewer
June 19, 2019
by James Brewer
June 19, 2019
Living within your means is a great idea, but it may not grow your wealth. Some believe that financial planning is an exercise in living within your means. From my perspective, that is not the entire story. Spending within your means may not have you allocating your money into categories that will sustain you through retirement much less turn into wealth. Financial wealth equals net worth. That is what is left over after you subtract your debts from your assets (Net worth = assets – liabilities).
Ready to grow your wealth, and your family’s? Let’s start your wealth building by hedging the risks to not receiving your future income. Any large building needs a solid foundation to stand on. Three risks to your income are unemployment, inability to work because of a disability and of course, unexpected death.
How many months of your monthly expenses do you have sitting in cash reserves should you find yourself unemployed? Three months of net expenses is a great goal to have, especially if you aren’t going to receive any kind of unemployment compensation should you find yourself unemployed. According to the Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2017, about 40 percent of adults said that if faced with a $400 unexpected expense, they would either not be able to pay it or would do so by selling something or borrowing money. Yet, the IRS reported that 70% of the 150+ million tax filers received tax refunds with an average payment of nearly $2,900. If you do find yourself getting a return on your taxes, that is a great way to start padding a cash reserve. What monthly savings would you need to get there?
What if you get injured and can’t work for some time? How will your income be replaced? More people suffer a disability than die during their working years. While no one seems to get excited about paying insurance premiums, we do enjoy the cash when there is a payout from that insurance. While I know you want to believe it won’t happen to you, and in most cases you’re right, the catastrophe of being wrong can be very costly. If you work for a large employer, you may have been able to buy e some coverage at the lower costs of a group policy. Unfortunately, group policies aren’t as generous with their payout as a policy specifically underwritten on you. After reading the details of the group policy you may want to also get a private policy. . You may find yourself paying taxes on the group policy where you would not pay the private policy.
Do you have life insurance that would at least replace your income from today through your expected retirement year so that your survivors will be okay? You at least should acquire enough life insurance that would replace the expenses that you or your spouse’s income brings into the family, For example, let’s say you make $50,000 per year and expect to work 20 years. That equates to $1,000,000 your family income expects to receive. This isn’t a perfect calculation, as you should expect some upward adjustments to income from inflation, nor does it subtract taxes. Knowing your expenses would be a better approach, but this one is a good ballpark. It allows survivors to pay the bills, save for college, your survivor’s retirement, and other wealth goals. Many people see life insurance as something that pays for burial and not something that replaces income and keeps survivors with a roof over their head.
To make ends meet, you may have elected not to save for your retirement. The word retirement may seem far off until you’re somewhere in your 50s. Unfortunately, many people find that when they started thinking about retirement, they had little saved. They then threw in the towel and concluded they would work until they couldn’t. To make matters worse, they may find themselves sick, physically achy and not feeling like they could keep up with the demands of their job. Choosing to not save for retirement assumes that their position won’t be eliminated or find themselves forced to take a pay cut.
Saving small amounts, for a long time, can grow to surprisingly large numbers. The power of compounding turns them into much larger quantities.
Does your budget include savings for your financial freedom? Further, have you had someone with financial credentials like Certified Financial Planner, Retirement Income Certified Professional, or Charter Retirement Planning Counselor help you determine what amount you need to save to create your picture of financial freedom? I recently had a conversation with someone who felt that she was maxing out her contributions to her retirement plan. After some questioning, I discovered that she was only getting the maximum matching contribution from her employer. While 6% in total may sound like a substantial amount of money, 3% was her contribution that may not be the amount she needs to save. There are many factors involved in that calculation such as: when saving began, the dollar amounts requiring replacement, desired monthly income for their subsistence, their comfort with risk, the returns they will achieve, and levels of sporadic or volatile returns will they experience.
Oh yeah, do you have children you want to help get into college? Depending on the age of the child it may be smart to have something – sooner than later. The longer you wait, the less chance you have for your money to benefit from compounding (growing it to a much more considerable amount). While not saving isn’t the worst thing, it does subject you and your child to the possibility of the burden of some serious student loan debt.
Don’t despair; today is the best day for architecting a comprehensive spending plan. As opposed to a budget, the spending plan becomes a blueprint for what you want your financial life to be. It also informs what areas need attention and when. Imagine your joy as you begin to see all the areas of your wealth grow, knowing that you have addressed the risks to its growth. Don’t you owe it to yourself to start today?