Keeping Perspective on What You can Financially Control

I understand that it can be confusing to know what financial decisions are most important to pay attention to and which ones should be left alone or passed off to others. I may encourage you to pay attention to your budget so that you are set enough aside for financial independence.  And yet, at other times during the planning process, I may encourage you to look the other way while investments do their work. Creating a sound financial plan includes knowing when to make the most of things you can control and how to evaluate situations that are somewhat or completely out of your control.

Things you can control: Spending and Savings

Savings and spending are areas within your control.  Although it may feel particularly difficult at times, getting a hold on your spending and developing a savings strategy is up to you.  Gaining control of your spending and savings is possible with patience, getting organized, and behavioral changes.  Behavior changes often start with finding a convincing reason to make the changes, such as achieving financial independence later in life.

One of the best ways to save is by making consistent contributions to your accounts. Not only does it maximize your returns, but the discomfort of giving the money up for your current pursuits is less when the money is removed from your accounts before you have a chance to miss it.

Having a spending target not only helps you maintain financial balance today, it allows you to control how much you can put aside for your future self in retirement.  Creating and shaping your goals is another area where your decisions influence the result. Therefore, take time to consider what you want your future to look like so you can create a path to get there.

Another facet of your financial plan that is within your control is where you decide to save and what assets to own.  One way of describing what you own in an investment portfolio is asset allocation.  Asset allocation is a general description of the ratio of equities (ie. stocks) and fixed income (ie. bonds or cash). Diversification of your portfolio is having the right mixture of different stock and bonds in your accounts.  Building a portfolio that is diversified and has a suitable asset allocation will help you meet your goals.  Please be in touch with the firm if you have any questions about how these investment strategies are used with your accounts.

While we can advise on your portfolios, it is also our responsibility to help you decide which accounts you should be socking money into first.  You do have some control of these decisions, yet some accounts may just not be available to you. Here is an order or preference for which accounts you should put your hard-earned savings into:

  • Emergency Reserve (3-6 months)
  • Defined contribution (401k type) plan with an employer match
  • Health Savings Account
  • Additional payments on loans with 6% or greater interest rates
  • Maximize your defined contribution

While making sure you have enough emergency funds for unexpected life events is a top priority, you also want to accept all money that is available to you by taking advantage of your employer’s matching contribution.  Paying down loans and exploiting the triple tax savings offered through your health savings account are areas that could apply to your plan.

Partially in your control: Income and Longevity

Take some time to consider these other areas that are partially in your control and weigh how they fit into your plan.  Your income, how many more years until retirement and the length of your life all influence your ability to maintain a sustainable retirement income.  Is your income susceptible to change?  Will you need to change jobs before you retire? What measures can you take to safeguard against unanticipated outcomes?

Out of your control: Markets, policy and taxes

It is equally important to acknowledge and position yourself for financial factors that are beyond your control.  Advisors and economists do not have a crystal ball nor do they know what the markets will do tomorrow or in the future.  Building a diversified portfolio, and selecting a suitable asset allocation will help you to weather the storm of market volatility and changing market conditions.  Knowing what you are trying to accomplish is also very important for staying the course through unknown market conditions and changes to public policies. Taking a goal-focused approach allows you to adapt your financial plan more easily to the evolving tax code.  For instance, the government check from the CARES act stimulus plan might have been directed to your Roth IRA, paying taxes for an RMD Roth conversion, or just plain spending if all your other planning goals have been met.

Focus your energy where it matters most, such as developing good spending habits and creating a savings plan.  Try not to waste precious emotional and mental resources worrying about what you can’t control, such as what the markets will do next or whether social security will be there when you retire.  Keeping these priorities in mind are important steps in maintaining a sound financial plan.

Stop guessing. Start planning.