The Durable Foundation of Successful Financial Plans
The strength of every structure lies in the foundation on which it is built. While recently viewing an historic building as a potential future home for our office, to the noticeable discomfort of the selling agent I spent most of the time in the basement examining the foundation, sill, and support columns. Your family’s financial plan is a monetary structure, and lest it be built on the following firm foundation, it’s unlikely it will survive the test of time. The best family financial plans abide for generations, and there are cases in which families have retained and grown their wealth for 1,000 years. Consider the elements and simplicity of the durable foundation on which successful financial plans are laid.
Manage debt like you would a pet scorpion; cage it, starve it, and if you’re smart, you’ll terminate it. Virtually every financially successful person I’ve encountered in 33 years in this business functioned with minimal or no debt. You will never build financial wealth as efficiently in debt as you can debt free; therefore, make the following your highest financial priorities: a) follow a specific plan to aggressively reduce your debt until it equals less than 10% of your net worth, then make a plan to get it to 5%, then never let it exceed 5% again, and b) do not retire with any debt of any kind. Retiring in debt is like walking a greased plank blindfolded over a pool of starving sharks!
Maintain adequate emergency savings. Running a financial household without ample cash savings is like climbing Mt. Everest without crampons; every slip weakens your condition and reduces your probability of success. Absent sufficient emergency savings, unforeseen expenses will cause either borrowing, or a distribution from long-term investments, both generally destructive maneuvers. The appropriate amount of emergency savings is 9 months of total annual household expenses, so develop a budget and understand the cost of running your financial household. Don’t exceed the recommended amount by much or inflation will eat your lunch; don’t lag it by much for the reasons mentioned above; when circumstances require payment, replenish the amount as quickly as possible, which is one of the many reasons we must live below our God-given means.
Own the right amount of the right type of life insurance. Is the need temporary, like protecting a spouse or child from loss of income due to death? Then fund the need with temporary, or ‘term’ insurance, and shop around. Is the need permanent, like making sure sufficient capital is available at your death, and quickly enough to pay estate taxes so the family business isn’t lost? Then fund it with permanent insurance, and shop around. If you need help figuring the appropriate amount of coverage, or with researching the myriad of policy types and features available today, find a trustworthy, independent agent who will represent your interests; proprietary agents represent the interests of a specific insurance company. Never own a dollar of insurance you don’t need, and avoid the painful mistake of buying the wrong type of policy given your need.
Think about it. Shaun
The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.