What a whirlwind of a month — it seems as though every aspect of our financial life is subjected to some sort of major change. The taxes we pay, the deductions we use to lower our taxes, the retirement accounts we use and even our health insurance are all on the table. For now, this shake up will lead to nothing short of speculation. But what is more critical is figuring out the areas in our lives where we have some control over our financial decisions and being able to understand how those decisions can affect us in the future.
When it comes to financial decisions (and life), it’s important to make sure what we’re spending time thinking about and focusing on are things within our control. We can spend a lot of energy thinking about events that may happen and hurt our vision of the future, but will that energy spent keep those events from happening? Will it even make us better prepared to address those changes? We know it won’t, but we do it anyway because it’s easier to think about what’s outside of our control versus thinking inwardly about our thoughts, patterns and choices.
Not only that, but the more decisions we make in our heads about how we’ll respond to possible events that may not happen, the more likely we are to suffer the effects of a phenomenon called decision fatigue. Researchers have found that our ability to make good decisions deteriorate after a long time of making choices. With all that has happened in the last month as it relates to our finances, many have been racking their brains trying to figure out what they’ll do about retirement savings, health care, insurance and taxes. The answers aren’t based on what the government decides to do to the rules, they are based on simple, time-tested rules we should follow to ensure the best chance of a successful financial standing.
You can’t afford not to anymore. There are too many distractions. Marketers have done an excellent job of weakening our resolve to save. They want us to spend. We’re coming upon a time of year that is synonymous with spending and excess. Last year, according to Forbes, consumers managed to spend $10.12 billion online between Black Friday and Cyber Monday. The average household is projected to spend $743 dollars during the holiday sales event, a 47 percent increase from last year. I love great deals, and there are plenty to be had this year, but without a budget, it’s very difficult to tell if it’ll be a good deal or a bad idea. Budgets get a bad reputation for being too constricting. If done right, they can actually free you from having to stress over financial matters all the time because it settles the issue of what you can and can’t afford. It helps with decision fatigue because we can’t think about the possibility of purchasing the item we want since there’s no room in the budget. After the first few months of sticking to a budget, you may start to see you’re spending less time feeling buyer’s remorse.
The key to a good budget is margins. Budgets only work because they tell us what’s left after we spend our monthly obligations, and we can therefore have a better grasp of how we should use those remaining dollars. If, on the other hand, there aren’t enough dollars to last the month, some items need to come off the list. Or at least it’s a wake-up call that the income isn’t high enough and something needs to be done to increase it.
Once the budget is done and hopefully there’s a healthy margin, the important task of protection begins. If you’re still working and the interest that you earn from your investments is much lower than your paycheck, it’s a good idea to protect that paycheck. Layoffs may happen from time to time and that’s why an emergency fund is so important. In my opinion, there isn’t a good enough deal out there to justify raiding the emergency fund for. Most people should aim for three to six months’ worth of living expenses. Regardless of how well the markets have performed, it’s never a good idea to keep those funds in stock or mutual funds — a boring savings account is the right place for it. And if you’re willing to deal with an online bank, you can get a little over one percent in returns.
If health insurance is a concern, then the emergency fund needs to be large enough to cover out-of-pocket expenses. Some employers offer a Health Savings Account, so it might be a great idea if you’re healthy and don’t have a big risk of needing large medical expenses because it only works well if you can save for a few years without having any major outlay.
Protecting income is so important because, for most of us, it’s our largest asset. Not the annual amount, but the amount you can make in a lifetime. But, what if there’s a premature death, or an injury that results in an inability to work? That’s why it’s important to address whether we have enough life insurance and disability insurance coverage. The rule of thumb is to have 10 years’ worth of your salary in terms of life insurance. Disability insurance is in the case of an accident or injury that might limit your ability to work for a long period of time and is much more expensive for people who work with heavy machinery.
We can’t all work for the rest of our lives, some will have to retire for one reason or another. Besides, Social Security will not be enough to pay for all our income needs in the future. Whatever the rules may change to, most people should still save. We don’t all need to save 15 percent of our income. If we have a budget in place, and are well protected, we’re in a much better position to create a game plan for the future and use financial models and calculators to help us determine an ideal savings level.
Issues pertaining to changes in taxes and retirement accounts are important to keep a close eye on, but their effect is irrelevant if we don’t take the time to address the three areas we have the most control over. It’s never too late to start and your future self will thank you for it when you sit down for a thanksgiving dinner a few years from now.
Ash Toumayants is the founder of Strong Tower Associates, a retirement planning firm dedicated to helping clients in all stages of life prepare for retirement.