About 43% of you worry about money. That’s what the Institute of Financial Planning and National Savings and Investments found. That means that you’re putting a lot of energy into something that won’t earn you any compound interest, capital gains or dividends.
Breaking Free of the Worry Maze
The good news is that you can exit that worry maze. All it takes is being willing to become “strategic” in how you approach money. That is, you make a habit of planning your spending and investing based on your goals for your life. None of your financial decisions will ever again be random or impulsive.
So, what are your goals? They might range from helping finance your children’s education to maintaining your current lifestyle when you retire. Over time, as you age and your circumstances change, you will keep reviewing your plan. You will continually make adjustments. That’s called “dynamic planning.”
Here’s a typical situation. Your children have completed college. That means you can shift more money into building wealth for retirement.
- How much of that incremental funding should you put in equities and how much in bonds?
- Should you be considering alternate investments such as gold and commodities?
Those are big, complex issues. But you will be approaching them strategically. Not simply worrying about your present and future.
Dynamic Planning – Being Ready for Everything and Anything (including uncertainty)
Once you start planning, you become the Chief Financial Officer (CFO) of your life. Just like the CFOs of the companies you work for, the buck stops with you. The only difference is this: Your responsibility is only for the results your own financial decisions generate. You don’t have the profitability of a whole company on your shoulders. However, to you and your family, the stakes are still very high.
Here are the four musts of dynamic planning.
- Become very smart about your little piece of the world of finance
You work hard for your money. Therefore, you want to protect what you have. Those layers of protection are created through how you manage risk. That’s job #1 for you as CFO of your life. To do it, you have to become very smart about what impacts your money. Both positively and negatively. On that basis you make your financial decisions for the short term and the longer term.
For example, in this low-interest rate environment, the time might seem right to apply for a mortgage to purchase a house. But before you do that you should consider the potential for that asset to appreciate, the fixed and unexpected expenses, and what potentially better investment options there might be. You should also factor in that for the first time in 6 years, reports MPF Research, the rental market is cooling. Demand is declining, which reduces landlords’ ability to raise rents as much as they had in the past.
- Would an investment in equities have a better potential payoff?
- How about stocks which provide reliable dividends?
Money from dividends could be coming in, not going out in house repairs during your retirement. Also, ask yourself: What unnecessary risks are you taking on by buying a house at the current time?
- During transitions, take advantage of compound interest
This isn’t your father’s career – or life. There are so many more transitions. For example, you may be waiting to find out if you will be promoted or laid off. That will reconfigure your income – upwards or downwards. Until that happens you’re on-hold. While there, you can still make your money work for you and yet keep it liquid. You do that through on-demand accounts, such as money market ones, which provide what is called “compound interest.”
Essentially compound interest operates just like its name indicates. It keeps compounding or increasing what you earn on the account based on what you have already earned. For instance, say, your deposit in a money market account yields $25 in interest this quarter. Next quarter’s interest will be calculated based on not only the principal but also that additional $25. When interest rates increase, the yield just from this compounding tactic could be significant. To keep some funds liquid, you might decide to have a percentage of your funds continually in on-demand accounts which provide compounding.
- Participate in tax-deferred investment plans
When it comes to building wealth to fund your retirement, the government has been on your side. Among the financial vehicles for acquiring assets on a tax-deferred basis are the defined contribution plan and the individual retirement account (IRA).
In many workplaces, the defined contribution plan has replaced what used to be a guaranteed pension. It can take the form of a 401(k), 457 or 403(b). Thanks to updates in the Pension Protection Act of 2006, you can now have guidance from a financial advisor. Also, your investment options have been expanded.
The problem is that only 30% of you who have access to a defined contribution plan participate in it. That’s what the Department of Labor reports. That makes no financial sense. Often employers add to the funds. The wealth grows with the taxes deferred. And, given current longevity trends, you could spend up to 30 years in retirement. To do that comfortably, Fidelity estimates, you will need between 60-80% of your current income.
Another option the government makes available to you for tax-deferred wealth building is the IRA. Each year you can put in up to $5,500. When you are 50 years old or older you can deposit even more than that.
- Embrace the new realities
All of us, both investors and we who guide you, are living in a global economy continually disrupted by technology. That has introduced increased volatility into financial markets. Therefore, so much of the conventional wisdom about investing is being questioned.
The classic example is how experts are re-thinking the mandate that investors reduce the percentage of equities as you age. The rule of thumb used to be to subtract your age from 100. The number which results represents the percentage of equities in your portfolio. So, if you are 60, in the old days, that would have been 40%. That’s 20% less than the traditional 60% of equities and 40% of bonds in the standard portfolio.
But, 40% of equities might not generate enough money for your 30 years of retirement. You could run out of money. So, what should you do right now about asset allocation in your portfolio right now?
There are few – if any – absolutes in investing any more. The trick is learning to feel comfortable building your wealth amid so much uncertainty. That’s possible when you commit yourself to dynamic planning. You don’t settle in. You continually are alert to red flags and to emerging opportunities.
Now that help is available…
Whether you have a dollar or a million dollars in your retirement account you will be able to explore the value of a real advisor. simply by visiting the Self Directed Brokerage Account advisor contact site .From this site you can begin to take advantage of the features of your retirement plan. If you wish you can also download a fact finder sheet that can be used to create your personal retirement financial plan (you can also upload it from here when complete)
Most company retirement plans are eligible and more are being added every day.
Watch for our next post on why just 1% matters so much for your future retirement.
To learn more about Rick Willoughby, view his Paladin Registry profile.
Other posts from Rick Willoughby
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who...
There’s a lot to consider when it comes to retirement investing. Some worries that may arise include how...
We’re lucky to live in the information era. Anything we want to know is at our fingertips via...