Let’s take the KISS principle keeping it sweet and simple. One of the biggest hurdles investors face is the old mandate that one should set 6 months of earnings aside in a savings account for that rainy day before beginning their investment plan. To which I declare: nonsense!
- First, it is a daunting task that may never be started.
- Second, with bank account rates of return at record lows, at 1% a year or less it may take you 72 years or more for that money to double.
- Third, while it might make for good commonsense, it just doesn’t work.
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According to the National Bureau of Economic Research one-half of Americans would be hard pressed to come up with $2,000 in an emergency. Many of us learned from a plethora of sources to spend, baby spend! As Charles Noble said, “First we make our habits, then our habits make us.” With financial freedom in mind let’s start today with creating new habits. Then we can feel good about what we are doing now as well as in the future as opposed to being paralyzed by doing nothing.
Ideas that work
Look at your current situation and determine how much cash you need to keep in a savings account. The stock advice to keep 6 months on hand is just a way to begin thinking about what works for you. If you have reason to believe there might be a job loss in the near future you may want to sock away a year of savings in advance. If the job and medical situations look to be stable at this time it may make more sense to limit cash reserves to 1 to 3 months. Money that isn’t expected to be needed soon can be placed in liquid accounts where funds can be redeemed in less than a week. In the meantime, you know that this money is available in an emergency, but at the same time funds are working to help you achieve your long term goal of financial independence.
Another idea is to pay attention to your finances. So many payments, like magazine subscriptions are on auto-pay that we never look at the total amount of money coming out of our checkbooks on auto-pilot. One of my sons and I were talking and he said he wanted to save $1,000 a month. I asked if that was possible today. The answer was no way. Rather than wait for the perfect time to set aside the perfect amount I encouraged Matt to start with what he could do with his eyes closed. Starting with $250 a month, using time on his side may have a far more favorable impact than waiting for all of the lights at every intersection to turn green on a very long journey.
On course or lost in space
It is not uncommon for me to see a homeless gentleman close to my office at the Westlake off ramp from the 101 Freeway. What makes this man particularly interesting to me is that he is usually at his post holding a sign that reads, “I Need $240 Today.” I am impressed that unlike others, he has a goal. He may never reach his goal but I have been so inspired by is having the courage to ask for what he wants that I have made donations to him and wished him good luck.
When it comes to achieving financial independence too many investors do not have a clear target they are trying to reach. They may feel good or bad about how their stocks or their real estate performed on a daily basis, but they don’t have a clue as to how much money they might need to make work optional at some point in time. Do you have a financial goal? More than half (56%) 1,000 Americans surveyed at least age 25 earlier this year have yet to attempt (nor has their spouse attempted) to calculate how much they will need to accumulate for their eventual retirement. Before you might hit a target you have to clearly see your objective. Most Americans spend more time planning their vacation than we do our financial future. When it comes to dollars and sense please be moved to take time this summer to determine What’s Your Number? to make work optional. The question won’t get any easier to answer than it is right now.