One of the most critical factors of long-term personal financial success is… guess:
- The markets
- Spending
- Interest rates
- Stock selection
- Income level
And the answer is… SPENDING. This fact is why a truly competent financial planner will spend the most time on discussing spending, both today and future projected, along with GOALS (Goals are what people spend money on).
However, the inevitable will happen. “The inevitable” means all those things included in Murphy’s Law. Murphy’s Law states simply that if anything can go wrong, it will. Note the word, “can”. Of course, anything can go wrong. Therefore, count on one or more things going badly wrong along the course of a person’s life and financial life.
Consider the following true story that happened recently (harmless but went wrong nonetheless). All at once, a couple’s refrigerator and master shower (1st floor master with all other baths upstairs) stopped working – with a breakout of ants to make the situation even more interesting. In addition, an HVAC unit is on the horizon for replacing. This is expensive stuff and can happen in the nicest of homes!
What if all these things happened,
- In the first year of retirement which could possibly coincide with a market downturn?
- Or in the year a child starts college, with tuition due imminently?
- Or in conjunction with a fender bender or minor car incident?
- Or amidst an urgent or ongoing health challenge?
The most basic factor that can soften a huge spending blow is CASH. Holding an amount of cash – uninvested savings in the form of cash – is key to surviving Murphy’s Law events.
Another important factor to consider is separating “emergency fund” or fallback savings from “slush fund” or vacation savings. When Murphy’s Law events happen, often it is tempting or necessary to pay on credit or use monies designated for other purposes – greatly upsetting a neat strategy of reducing debt.
Another critical factor is being realistic about spending. There are certain items that most people know they want and need but do not plan for adequately. Necessity items like transportation and primary home need to be funded from allocated savings. Aspirational items such as fun cars, second homes, vacations, and club and family activities need also to be funded from allocated savings – but separately allocated, planned savings.
The good news is that typically Murphy’s Law events don’t happen every day and can be anticipated and factored in to a short- or long-term financial plan.