We have discussed a variety of topics these last several weeks. Most of them have been designed to get us to the place where we can have some “free cash flow”. There are really only two sides of that equation: Income & Expense. We have spent the majority of time on the Expense side of the ledger; though we have realized that sometimes the need is on the income side.
This week we are going to talk about a concept that might feel like a foreign language to some of us. The whole concept of savings. We ultimately want to start a “stairway” of sorts. This week we are going to cover emergency fund, savings, and investing. Next week we will talk about retirement planning. Some people wrestle with this whole area, not just because they can’t control spending, but because they feel it somehow represents a lack of faith. Consider these scriptures:
“Go to the ant, you sluggard; consider its way and be wise! It has no commander, no overseer or ruler, yet it stores its provisions in summer and gathers its food at harvest”(Proverbs 6:6-8)
“In the house of the wise are stores of choice food and oil, but a foolish man devours all he has”(Proverbs 21:20)
Ron Blue suggests that there are really two seasons in the life of a person from a financial perspective. There is the accumulation stage and the preservation stage. Accumulation is when we are wanting to gear up for financial independence, and preservation is when we want to maintain our standards. He then provides a very helpful tool:
Sequential Accumulation Strategy(Ron Blue)
(Must have a positive cash flow margin!!!)
- Eliminate all credit card and consumer debt
- Set aside one month’s living expenses in the checking account(if you are disciplined!)
- Save between two and six months of living expenses in interest-bearing money market fund account for an Emergency Fund
- Savings for major purchases
- Accumulate to meet long-term goals
- Use investment dollars to speculate in higher-risk investments
Austin Pryor uses a similar, but somewhat different sequence. For the rest of our time tonight, I am going to be referring to his sequence. He uses a four level description:
Level One: Getting Debt Free
Level Two: Saving for Future Needs
Level Three: Investing your Surplus
Level Four: Diversifying for Safety
Pryor believes that working on level one and level two is prudent. In particular, an emergency fund enables you to avoid future debt that might come with an unexpected loss in income. He suggests 3-6 months, with a minimum of $10,000 if you are married.
Making the sacrifices necessary to complete level One(getting debt-free) and level Two(saving for future needs) is not a lot of fun-but necessary to build a secure savings plan.
Emergency Fund should be put in a very safe place; preferably earning money market rates, but not nearly as accessible as your checking account! Consider Credit Unions, or if you bank with an institution..become a preferred customer! Make them earn your business!
Long Term Needs: Appliances, Automobile, College. Have a regular plan.
Mutual funds: Pool of money formed when thousands of investors team up to diversify and get competitive advantages. Every fund has an investment objective. That objective, along with past performance, the risk of the investment type, along with your personal objective is the grid that helps you determine whether or not to invest with them.
Typical Objectives: Fixed Income, Corporate Bond, Equity Income, Growth & Income, Growth, Aggressive Growth, Worldwide, Specific Regions.
In general, you want to stay with “no-load”(no initial sales fee) funds; looking for funds that have low expense charges(typically around 1%). You can get USA today, Wall Street Journal, MONEY or other magazines that review and preview mutual funds as aids. You may also want to consider mutual fund brokerage services offered by people like Charles Schwab or Fidelity.
Consider dollar cost averaging into mutual funds. Recognize that there are risks to EVERY form of investing. Each step you take away from US insured means an increase in risk!
“A faithful man will abound with blessings, but he who hastens to be rich will not go unpunished”(Provers 28:20)
“Dishonest money dwindles away, but he who gathers money little by little makes it grow”(Proverbs 13:11)