By Steve Davis, CFP®
I recently flew out of Green Airport and as I awaited takeoff, the flight attendant began her customary pre-flight safety instructions. I must say that I always find it amusing when the attendant demonstrates the proper way to engage and disengage a seatbelt. Seriously, if you don’t know how to operate a seatbelt latch by now, you probably shouldn’t be out in public unsupervised! But even though a problem during flight is only a remote possibility, airline regulations wisely require that the basic rules be reviewed and nothing left to chance.
I recently flew out of Green Airport and as I awaited takeoff, the flight attendant began her customary pre-flight safety instructions. I must say that I always find it amusing when the attendant demonstrates the proper way to engage and disengage a seatbelt. Seriously, if you don’t know how to operate a seatbelt latch by now, you probably shouldn’t be out in public unsupervised! But even though a problem during flight is only a remote possibility, airline regulations wisely require that the basic rules be reviewed and nothing left to chance.
So everyone put your seats in the upright position and lock your tray tables while we review a few basics of personal financial planning.
Lesson 1: Should the cabin lose pressure, first place the oxygen mask over your own mouth before assisting others.
The same holds true when focusing on your personal finances. You should pay yourself first before paying others. Sure, you would like to get in the habit of saving money, but you may find that at the end of the month there just isn’t any money left. It is easily observed that many families will spend more money than they earn simply because our wants naturally outweigh our means. In 2010, for example, the average household carried nearly $6,500 in credit card debt because they could not afford to pay the balance from their current income.
The answer to this dilemma is to pay yourself first. Why first? Because most people save what’s left over – after bills and discretionary spending. And too often, at the end of the month there just isn’t enough left over to payoff the credit card bill let alone save for the future. When you pay yourself first you are indicating that you and your family are more important than the phone company, the cable company, or any of the other companies that send you bills each month.
The best way to start paying yourself first is to do it automatically. Sign up for the 401k at work, especially if your company makes matching contributions. Open an IRA or start a 529 college savings plan and setup automatic transfers into these tax-advantaged accounts.
If you’re not saving 10-20% of your income right now, then you’re likely living a lifestyle that you cannot afford. If you’re struggling to find money to save, consider putting away just 1 percent of your income and then gradually increase the amount. Find ways to reduce your spending, or more importantly increase your income. Now that the New Year is upon us, make savings one of your family’s first priorities.
Lesson 2: Turbulence is expected so wear your seatbelt at all times.
For most of us, we have seen firsthand the highs and lows of the stock market. No one needs to remind us about market volatility anymore. The 1990s enjoyed the biggest bull market in history when the Dow more than quadrupled. More recently, we all saw the Dow suffer its worst point drop in history back in September of 2008. Here are a few strategies for riding out the bumps:Stay calm and resist making long-term financial decisions on the basis of single events. During the 2008-09 market downturn many 401k sponsors reported that plan participants either reduced or entirely stopped their retirement plan contributions. Unfortunately, the emotion of fear sometimes prevents us from buying low. Instead of fearing a down market, view it as an opportunity to buy shares at potentially lower prices.
Create a diversified portfolio to help reduce risk to your investments. Different assets classes like stocks, bonds and cash do not usually act in the same way at the same time. Investing in different geographical areas means you aren’t subject to the same political events or natural disasters which may affect companies differently. Investing all available money in “dot com” stocks was a bitter lesson for many who saw their favorite “dot com” turn into a “dot bomb” in 2001. While diversifying doesn’t eliminate risk it does reduce the effects of volatility.
If you have an investment portfolio, you will have likely just received your year-end statement. Now is the time to review and evaluate your holdings. Determining which mix of assets to hold in your portfolio is a very personal one. The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk. Seek professional help if you need guidance.
Lesson 3: Have a great flight.
One of the benefits of financial planning is to develop a flight plan that you and your family can follow. In the coming weeks, I plan to share my thoughts on money matters. My objective will be to help you arrive safely at your ultimate financial destination. I’ve been helping clients for more than twenty years and you can rest assured knowing that I have travelled this route for a long time.
You may now turn on your portable electronic devices, recline your seats or move about the aisles if you wish. It’s going to be a great flight.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This article was written by Steve Davis and appeared in the column "Talking with Davis about Money Matters" found at http://mansfield-ma.patch.com/columns/talking-with-davis-about-money-matters
This article was written by Steve Davis and appeared in the column "Talking with Davis about Money Matters" found at http://mansfield-ma.patch.com/columns/talking-with-davis-about-money-matters
