5 Keys to Financial Success

Gerald D. FaheyDecember 11, 2015

Financial Planning

We were recently asked by a local chapter of the Chamber of Commerce to make a presentation based on the timeless concept of “The 5 Keys to Financial Success”, so we thought we’d share some of these thoughts as we go into the 2016 New Year.

The first key that comes to mind is savings and your approach to it.  Have you even established any goals for saving?  If you are employed, do you have a disciplined process in place to save money?  Do you “pay yourself” first with an automatic savings contribution from your paycheck?  Have you set aside emergency funds to pay for a major car repair, the new furnace or a medical issue with out-of-pocket ramifications not covered fully by health insurance?

For retirement, are you saving as much as you possibly can?  If your employer has a 401(k) plan, are you making the maximum contributions to it?  In 2016, the maximum contribution is $18,000 or $24,000 (including the $6,000 catch-up provision, if over age 50), this is a tremendous opportunity to build a retirement “nest egg” and reduce taxable income at the same time.  We see some clients who do not take full advantage of employer matches in their retirement plans.  If your employer is going to match 100% of your 5% contribution, for example – how can you say “No” to doubling your money?  If you are not sure of details with your employer match, now is the time to find out!

Traditional, Roth, SEP and non-deductible Individual Retirement Accounts (IRAs) can also be effective ways to supplement your retirement resources.

If you have already retired, are you spending all of your excess funds or saving and investing them for future needs?  What about establishing a legacy for the next generation or for any of your charitable intentions?

For your bank assets, let’s put the current interest rate environment in perspective.  According to Forecast Chart, the average yield on a 6 month CD back in October 1980 was 12.99%.1 In October 2015, the same 6 month CD average yield is 0.13%!  There has been much speculation this year regarding a Federal Reserve federal funds rate increase and it will likely start soon, so rates may start to creep up eventually but at a very deliberate pace.

The second key is budget and the level of household spending.  Many folks do not even have a budget, so we think it makes sense to consider one.  In drafting financial plans for clients, we sometimes get a sense that a client has no idea how much is spent month to month or over the course of a year.  If you were a business, a budget to monitor cash flow would be a common practice, maybe it would be prudent to do this with your household budget?

If you currently use a budget, it should be monitored on a regular basis.  You may find that you spend a lot more than you think or unnecessarily on frivolous items?  Maybe you could save through “bundling” some of the line items in your budget such as telephone, cable and internet services?  If you are like most and have various homeowners, auto, life, disability and umbrella insurance policies in place, talk to your insurance agent about getting a better deal by packaging these policies together.

The third key is managing risk and there are many angles to approach this topic.  One solution to manage risk is to transfer it to another party.  When you buy a life insurance policy, you are transferring the risk of premature death to an insurance carrier. Through the policy death benefit, you are able to replace income, pay off a mortgage or any other debts or perhaps fund education needs of your children.  The same approach goes for disability, homeowners, long term care or any other insurance – you pay the premiums calculated by the actuaries of the insurance companies and gain the ability to transfer the financial risk of such an event to them.

You can also manage risk by avoiding it.  If you are terrified of roller coasters (I happen to love them!) because you could get hurt or killed on them or you don’t like heights – don’t ride them!  Many people don’t like to drive at night because it is so dark and visibility is so poor – so don’t drive at night and risk an accident.

Another approach to risk management is to self-insure.  If your situation is such that the risk of a financial loss would not cause a catastrophic blow to your financial picture, one could choose to just assume the risk.  This is a topic of discussion that we have with many clients as they consider the options of protecting the risk of loss through insurance or assuming the risk that they could sustain the financial loss of a given event.

The fourth key is to invest with purpose.  In investment planning, we regularly evaluate market risk as an important component of an overall financial planning strategy.  Within this discussion, we frequently review the merits of proper asset allocation, diversification and rebalancing within a long term strategy.   In our practice, we also discuss the financial risk posed by the market to our clients and sometimes have to play the role of psychologist to address client’s impulse for rash actions related to the emotional reaction that can be caused by periodic market turbulence.

When purchasing securities, there should be a purposeful entry and exit strategy.  This is the familiar “buy low and sell high” tenet of investing as part of one’s long term plan to maximize market gains but be ready to sell at the right time.

Investing with purpose also includes being tax-efficient within a taxable account.  The adage “It’s not what you earn, it’s what you keep” would apply here.  At our firm, we make every effort to be meticulous in the effort to deliver the highest after-tax returns possible to our clients.

So one component of this philosophy is to avoid to try to time the market and invest for long term growth.  As investors, we need to pay attention to the tax efficiency within a portfolio.  In taxable accounts of our clients, we generally use a mixture of municipal bond funds and more passive equity based funds.  Both of these fund types are designed to provide either tax-free interest income or minimal capital gains.

Investing with purpose is also evident in the final quarter of a given year, where we are careful about purchasing mutual funds distributing capital gains in the month of December.  If you have just purchased a fund, it is very tax inefficient to be paying capital gains a month or two later, especially since you just bought it!

The fifth and final segment of this discussion is to develop a family plan and communicate it within your “circle of trust”. Family members including your spouse, siblings and grown children should all be made aware of your estate plan, if possible. We might suggest a family meeting to discuss these types of matters in an open forum?  We recognize that the dynamics of some families may not lend itself to an open exchange such as this.  In some cases, this type of dialogue may cause more damage than anything else.

At a minimum, your financial advisor, attorney and accountant should all know the details of your estate plan.  These professionals have a fiduciary responsibility to do whatever is in your best interest during your life and after your death.  If you truly wish to have your estate matters and legacy intentions executed properly, it is also your responsibility to communicate the specifics to the important individuals who will get the job done for you!

At HFA, we constantly strive to deliver exceptional financial advice to our clients – hopefully this narrative demonstrates that commitment!

1. Forecast Chart – CD Interest Rate Chart