Blogger’s note: This message was originally sent out in July, 2008, at the height of that year’s market meltdown.
During times of economic and market turmoil like we are seeing today, I invariably get asked: “Is it time to cash out and head for the hills?” What they are really asking is what does the future hold and my answer is: I don’t know…it’s the future.
What I do know is how to weather-proof a financial house based upon historical and common-sense evidence. That is what I have built my Financial Report Card around and to the degree that my clients follow it, they will fare well in all economic times. However, I am a financial ADVISOR not a financial DICTATOR so I can not make you do the things I suggest. But if these trying times have got you thinking about whether or not you have a good financial plan, maybe it is time to review your score on the financial report card and to enact the items that you’ve neglected or put off.
To that end, I offer this brief review of the four categories of the Financial Report Card and the underlying areas that I score. These are:
- Money Management
- Emergency Preparation
- Financial Stability
- Future Planning
Under money management, I look for things like whether the client has a budget or not, whether they have a regular savings program and whether they have a debt reduction program. Ideally, you would have a working budget, be out of debt (excepting your mortgage) and have a savings program that incorporates the infinite banking concept. For all of these things I have resources that I can recommend to you.
Under emergency preparation, I look for things like whether the clients have emergency provisions, emergency cash savings and proper insurance on life, health, disability and property and casualty. Let’s face it, if the economy COLLAPSES the only thing that we will consider valuable are things that we can use to stay alive. You should also have enough cash on hand (either in your home or at a local bank) to pay your expenses for 3 to 6 months. The problem with emergency provisions is usually two-fold: how much should I have and how do I rotate it to make sure it is good when I need it. For this I have some recommendations and welcome the advice of others, but it is truly an issue that will vary for each individual and family.
Under financial stability, I look for things like whether the client has intrinsic worth items, an alternative earnings method and passive income generators. An intrinsic worth item is anything that has value in itself: food, firearms/ammo, gold/silver, jewelry, tools/equipment, collectibles, livestock, etc. I generally recommend that a person have approximately 10% of their net worth in this category (which can and should include your emergency provisions). Additionally learning a trade that can earn you a living (other than your current job) or having resources that produce income for you without your direct efforts (a passive income generator like oil well royalties or rental income) would greatly reduce your anxiety about your future sustainability.
Finally, there is the future planning category. Here I look for retirement funding planning, education funding planning and tax reduction strategies. For most people these assets are in the stock market (though it need not be exclusively so). This area is a cause of much anxiety to people for two reasons. First, too many people have TOO MUCH of their net worth in the market. Second, because the financial news is dominated by THE MARKET, most people are concerned when the market declines…because of reason one!
However, if you are fiscally disciplined (a budget), have a savings program and adequate cash reserves, are properly insured, out of debt, holding intrinsic worth items and emergency provisions, and have the other things set forth above, then will you be overly concerned by the bulls and bears that invariably come to the market? I doubt it.
Finally, I consider the order of these categories to be the correct prioritization. In other words, #1 is more important than #4. Most often, we do all of these things simultaneously. However, if you find yourself having financial worries or troubles, go back to basics and make sure that #1 is being handled well. Usually when we do this, #2, 3 and 4 will follow.