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 Murphy’s Law. Murphy’s Law states 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, perhaps often, along the course of a person’s life and financial life.
Consider the following true story that happened recently. 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 of these things happened,
- In the first year of retirement which could possibly coincide with a market downturn?
- In the year a child starts college, with tuition due imminently?
- In conjunction with a fender bender or minor car incident?
- Amidst an urgent or ongoing health challenge?
- In the first year of marriage?
The most basic factor that can soften a huge spending blow is CASH. Holding an amount of cash – un-invested cash savings – is key to surviving Murphy’s Law events.
Another important factor worth considering 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 specific purposes – greatly upsetting a neat strategy of reducing debt.
This final factor means being realistic about different types of spending. There are certain items that most people know they will need or want but do not plan for adequately.
- Necessity items like transportation and primary home need to be funded from earmarked cash savings.
- Aspirational, “bucket list” items such as fun cars, second homes, vacations, club and family activities also need to be funded from designated savings – separately earmarked savings (say YOLO savings, which means “You Only Live Once”) that may take a bit longer to accumulate.
The good news is that typically Murphy’s Law events don’t happen every day and can be factored in to a short- or long-term financial plan with the guidance of a qualified financial planner who you know and trust.