Don’t Get Distracted by the Stock Market
In a world that seems to focus way too much on glitz and glamour, it’s easy for investors to get distracted from the basics. As advisors, we can make the same mistakes. We have earned so much money over the past few years that it’s easy to count our winnings and forget about the fundamentals.
There is not nearly enough space here to talk about what every investor should do before jumping into the stock market. But here are a few financial absolutes.
First and foremost, we all need a financial plan. Whether you are Warren Buffet or eat at the local Chinese buffet, we all need a comprehensive plan. Most Americans spend more time planning their vacation than they do their financial future.
Debt is a cancer; it will kill you if ignored. It’s more important to retire debt than it is to try and earn millions in the markets. Attack debt with as much enthusiasm as you do when trying to save money.
The average American barely saves more than they spend annually. If we would save just 10 percent of our income, we would be financially independent. If you have a retirement plan with matching contributions from your employer, you must save as much as they match.
Start saving money early. Even if it’s a dollar a day it’s a start. Albert Einstein once said the greatest invention of all time was compound interest. Sadly most of us will save the bulk of our nest egg in the final few years before we retire. The Great Recession likely has increased this need many times over.
Insurance is not an option. Until you can self-insure, we all must have adequate insurance in many areas. If you are still working, I would argue your greatest asset is your ability to earn a living. If you are retired, then you have to protect your assets. We live in a very litigious society. One simple insurance tool is something called an umbrella or blanket liability policy. This is a must for every homeowner.
Don’t cut corners on your auto and homeowner’s policies. Make sure you have at least $100,000/$300,000/$100,000 in base coverage. You should have the same amount for uninsured and underinsured motorist protection. Check with your agent for details.
You must also have a plan to lower your tax burden and to plan your estate. Wills, powers of attorney and advanced health care directives are the basics we all need.
Finally, don’t give up. It’s never too late to start your financial plan. It’s never too late to start saving. How many times do you go to your favorite beverage shop every week? How many times a week do you eat out? Do the math and you might be astonished by how much can be saved with just a few lifestyle changes.
Fundamentals are not fun and it’s sure a lot more exciting to hit a big winner with your investments. But ignore any of the basics and you likely won’t be able to enjoy those winners.
And please don’t forget the worst retirement plan is one that requires six matching numbers!
Kevin Powell is a Certified Financial Planner and has been a financial advisor for the past 27 years. He can be reached at firstname.lastname@example.org.