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  • Writer's pictureRob Schmansky

Your Financial Life Taking Off

Robert Schmansky, CFP(r)

This is the 3rd installation in a 3-part series

This is the third and final blog in a series for those in the beginning stages their financial lives, and the pitfalls, learning, and strategies at each stage of starting out. Previously, I observed the potential for a lost generation of investors that I see mostly in those who have made it past the first few stages of their financial lives; mainly, those who have begun to amass significant savings, but do not have the fundamentals in place to maintain solid financial behaviors. It is this stage that my blog covers today.

This stage is when your financial life starts to get interesting! The fluctuations in accounts are more than you are able to save. Previously, the activity of saving muted the decline brought on by down markets. Now, a daily shift can feel like a week’s worth of pay has come or gone!

Planning and making the right moves becomes critical. In this time of rapid accumulation, it is important that your plan goes beyond the basics and incorporates your taxes, insurances, and estate plan. In order to continue to develop, you will have to be smart about how you save and invest, as well as ignore the pitfalls that can come with accumulated savings:

Pitfall #1 – Investing vs. Gambling vs. Speculating. These are three distinct concepts, though we often think of them in the same light. Investing is placing money into strategies where the long-run returns and risks are relatively knowable. Gambling on the other hand involves almost no chance for gain and the losses are total. Speculation is short-term gambling based on knowledge. Investing offers the only real opportunity over the long-run to build true wealth.

Pitfall #2 – Cutting back. As your income increases, don’t stall out on savings. Base your savings on a percentage of your income, not an absolute number, and continue to increase your savings to a target of 20%.

Pitfall #3 – It’s the whole that counts, not just the parts. Your individual investments will vary, but that doesn’t mean you should jump from winner to winner, or judge the success of your portfolio based on the performance of individual accounts. Having pieces of your portfolio that decline while others rise is what it means to be diversified!

It is also at this stage where planning becomes essential. Bad ideas are magnified, and if left unchanged can result in not efficiently moving toward your goals.

Develop personal and financial goals. If you haven’t done so seriously yet, now is the time to start to plan out longer-term goals. Start 5 years out. If everything went the way you would plan, what would your life look like? Consider the longer-term. What is it you want to be doing in 10 or 20 years? Is it what you are doing today? If not, what are the small steps that would move you forward to this end to start to consider today? Write your goals and the action steps out and revisit them periodically.

Have a plan. Having a financial plan that includes a plan for taxes and maximizing advantaged accounts like your 401(k) or 403(b), as well as IRAs and Roth IRAs, is crucial. Developing a long-term game plan to meet your goals will keep you focused, and on track.

Ignore the short-term. I speak with many today weighing the value of long-term retirement savings versus putting their money in 2% savings accounts or paying off a 5% mortgage. In their minds, the short-run guarantees are worth more than investing for the long-run in a diversified portfolio. However, this is investing based on yesterday’s returns, and ignores what may happen tomorrow, and what has happened through most time horizons.

To summarize and bring this series of blogs back to the starting point of potentially losing a generation of investors, this weekend, I spent time reading issues of Kiplinger’s from the early 1970s. While many of our challenges today are different, it was incredible to read the same economic catch phrases and concerns from a different time period. The market crash of 1973-1974 was devastating to those that lived through it. For those with a 5, 15, and 25 year time horizon, it was one of the best times in nominal terms to be an investor, and stocks gave the only liquid way to maintain the purchasing power of your savings. It is just as critical today understand the pitfalls and strategies at any stage to start out and stay on a prosperous track.

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