One of my favorite activities when the weather warms up is backpacking. I recently returned from a trip to the Shenandoah National Park where our group covered 30 miles in 4 days on the trail. I enjoy both the challenge and the solitude of being on the trail. The simplicity of having all that you need to sustain yourself, strapped to your back, is calming in a strange way. Luxuries create complexities. How much simpler can life get than food, water and shelter? It is living in its most basic form.
Of course, the process of deciding what to include in your pack is not as relaxing. The less weight in your pack the better, for obvious reasons. You want only what you will need, and not an ounce more. There is always the debate of ‘necessity’ or ‘luxury’. Do I really need that extra fleece? Can I survive without my backpacking chair? I follow a process of packing only what I believe I truly need, and then making two piles – one for the ‘absolutes’ and one the ‘maybes’. Can I eliminate anything further? Are the luxuries I have chosen worth the weight? Do I really want that extra food, or can I go without?
Managing our financial lives can be a similar process. Identifying the ‘absolutes’ and the ‘luxuries’. Are there items you should never be without in your financial backpack? Are there items you believe you need, but could actually do without? Are you willing to make trade-offs? One luxury for another?
Regardless of the luxuries, here are my 4 ‘absolutes’ for your financial backpack.
- Financial Plan – this is your trail map and therefore clearly an absolute. It tells you where you’re going, how long it’s going to take to get there and the pitfalls to avoid along the way. It needs to be comprehensive in nature and should cover the 6 areas approved by the National Endowment for Financial Education. A Certified Financial Planner™ can help with this.
- Cash Reserve – these are dollars set aside for emergencies or opportunities that may arise on a day-to-day basis. The refrigerator needs replacing, an unexpected car repair bill or a long weekend at the shore. A traditional bank account or money market account works well for these dollars, as they should be 100% liquid at all times. 3-6 months of your expenses set aside as a cash reserve is generally a safe amount to have in this type of account. Individual circumstances may dictate more or less.
- Adequate Protection – here we are considering your insurances – Life, health, disability and long-term care. Many times, clients are’ over-premiumed ‘and yet underinsured. Paying too much for too little. While some may feel life insurance or disability insurance is a luxury you can avoid, having adequate protection to provide for your family, for a reasonable premium, is an absolute necessity. A financial planner or insurance professional can help you determine the right type of coverage for your needs and ensure you are paying a reasonable premium.
- Retirement Savings – many times our clients struggle with the trade-off between funding competing goals. Is it better to put those extra dollars towards my children’s education or towards my retirement? The answer is your retirement, every time. It needs to be your top priority. There are dozens of ways for your children to fund their education. Granted, some are more favorable than others, but in almost all instances, there is only one way to fund your retirement – your savings! There are no scholarships for retirement. There are no loans for retirement. Unless you are thinking about work study, which does not sound like retirement to most folks, your retirement is almost completely dependent on your ability to save today.
Ensuring your financial backpack contains the necessities, you’re apt to enjoy a much more comfortable journey.
Hike on!
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA / SIPC. Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principle. With any investment vehicle, past performance is not a guarantee of future results. Diversification and asset allocation strategies do not assure profit or protect against loss.