Four Basics

May 03, 2018

On a regular basis, I see social media posts about financial questions. Someone posts asking for thoughts on contributions to retirement accounts, or how to deal with taxes, or even about how much they should be saving. These are great questions, and they often don’t get answered in a social media post. So, let’s review some financial basics with four foundational components.

1) Protection

I’ve written before on this topic, and it is worth repeating. The function of protection products and strategies is to create more certainty and reduce unnecessary, and uncompensated, risk. For example, I could keep the risk that if I cause a car crash, or I could transfer that risk to an insurance company. The costs for insurance are often so small compared to the potential loss, that it is much more efficient to pay premiums than to have a potential liability. This same principal applies to the potential loss of income due to death or the inability to work because of illness or injury.

Proper protection against large risks like liability, disability, and death makes savings, investment, and debt repayment strategies much more powerful. One unexpected event could throw the whole plan into chaos without good risk management.

2) Be a World Class Saver

In the last few years, researchers have spent hundreds, perhaps thousands, of hours trying to understand how much money someone needs to save to create the proper income at retirement. This effort has revealed two key facts. First, the later a person begins to save, the more of their income they must save to achieve the desired results. Second, the amount someone saves is far more important than a potential rate of return. A good rule of thumb is to save AT LEAST 15-20% of gross income. Specific situations may raise that minimum amount, but anything less than 15% may be insufficient to accomplish income creation needs later in life.

3) Be Liquid

Cash is King. Target at least 12 months of living expenses in liquid assets before allocating significant cash flow to illiquid assets or accounts. Cash provides a buffer that allows people to take advantage of opportunities and weather unexpected events. It is okay, and even good, to have significant cash assets that don’t have a meaningful rate of return. Their very nature means there is little to no risk of loss, even when the economy is uncertain and the stock market is down.

4) Eliminate Short Term Debt

Short term debt, especially credit card debt, is very expensive. Because of the carrying cost, many advisors move this item to number one, but we have it in its rightful place here: fourth. Too much attention to short term debt can cause people to reduce cash flow to the more important areas of protection and wealth accumulation. After all, what use is a lower credit card balance if income is lost due to death or disability?

It is better to maintain a balanced approach by maximizing protection, prioritizing saving, and then using strategies to reduce the cost of high interest rates. Often, balance transfer offers, debt consolidation, and refinancing can offer significant cost savings without impairing a person’s ability to protect against threats and focus on building assets.

Do you need help understanding to get started? It isn’t uncommon for me to speak with new clients who have a hard time identifying and prioritizing strategies and products. Options abound, and a keen advisor will be able to help you understand how to deploy your income and resources to more efficiently pursue your goals with less risk.

Just after college, Austin experienced profound loss with the early and unexpected death of his father. The positive impact of financial planning for his family eventually led him to pursue a career in financial service, and he joined Wealth Advisory Group in 2013. Austin received his bachelor’s degree from the University of Evansville, summa cum laude and has obtained the Retirement Income Certified Professional® designation from The American College. He is a member of the BEI Network of Exit Planning Professionals™ and is a Certified Exit Planner™.

Austin’s practice specializes in risk mitigation and wealth planning for business owners and medical professionals. His team provides expert wealth management, personal planning, and business transition planning for physicians, executives, and entrepreneurs.

Austin Bransgrove is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. Park Avenue Securities LLC (PAS) is an indirect, wholly-owned subsidiary of The Guardian Life Insurance Company of America (Guardian). PAS is a registered broker-dealer offering investment products, as well as a registered investment adviser offering financial planning and investment advisory services. PAS is a member of FINRA and SIPC. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Please consult your tax, legal, or accounting professional regarding your individual circumstances. Wealth Advisory Group LLC is not a registered investment advisor. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. CA License #0L00236