All posts by John Border

Five Financial Planning Basics To Remember

I went to business school more than ten years ago and unfortunately even in this environment the very basics of financial planning were simply not taught. You learn everything under the sun about cash flow, business ethics, and accounting but personal financial planning was mostly overlooked.

It’s no wonder that so many college graduates get out of school in deep debt and with little plan for the future. If you can’t teach those skills in a business curriculum how are you going to instill those skills in any other degree program?

Expect the unexpected

For me I exited college thinking I knew it all. I thought I had a great grasp on my financial future and I was convinced that I could dictate my path forward. Unfortunately the world doesn’t work that way. The first thing I ever really learned about basic financial planning is that you can’t plan for the unforeseen. You have to expect the unexpected and build your financial budgets around unknown factors.

Not a decade past after my graduation before the financial implosion rolled across the US and subsequently the rest of the world. With this jobs were lost, education made little difference, and job mobility became very tight. Not only that but equities lost an enormous amount of value in a very short time.

Get Insurance !

When you are just starting to plan for your financial future you have to expect things to not go as planned. Hope for the best but stay defensive. Insurance is a great representation of defensive positioning. You never know if you’ll need life or disability insurance but if you need it and you don’t have it your life can be in ruin in a very short time span.

In addition to expecting the occasional tough time in life and staying insured at all times it’s incredibly important to emphasize liquid savings in one’s personal portfolio.

Build Emergency Cash Fund

It’s true that non-liquid investments tend to produce the healthiest returns over the long haul but having cash on hand at all times gives you flexibility beyond your imagination. You may not be able to fully quantify the value of having liquid reserves because without cash on hand you can’t identify or measure missed opportunities along your journey. These missed opportunities are essentially lost return that you can never get back. You may have the opportunity to buy an asset that will return your investment many times over. By not having the cash on hand to purchase the asset though you will have missed out on 100% of the return.

For me this third basic rule was a cloud to me. I never had cash on hand. I always thought that I didn’t need it. If only I had been taught this early on I would be in a far better financial position today.

Pay yourself first

The fourth basic principal of financial planning is among the most commonly stated principal of them all. You need to pay yourself first in all situations. If you never pay yourself then you will never build your savings, you never experience the fruits of your labor, and you are always living on the edge.

It may be difficult to see how you can pay yourself first in all situations but if you don’t figure out a way to do so then why would you ever expect anyone else to pay you any more than you pay yourself. By paying yourself first in terms of savings and investments you practically force yourself to live on a smaller share of your income. This means you are living below your means and not going into pointless debt.

Avoid Debt

This of course leads into the rule that brings some people to financial ruin, short sighted accumulation of revolving debt. This should be avoided like the plague. There are only a very small number of circumstances where accumulating revolving debt is appropriate so it’s best to always err on the side of causation. Yes, you can use credit cards for the points but make sure you are paying them off every month. If you miss even a single month then the benefits of points are typically offset by the costs of revolving interest rates.

You should never look at debt as a bad thing, it’s a tool that helps us get what we want or need but it’s a counterproductive tool if we use it to accelerate our spending. Yes, immediately you’ll experience faster consumption and a better quality of life but this can easily snowball into an anchor that holds you back.

Investment debt such as student loans and mortgages are perfectly fine but there is no reason why you should be financing a weekend trip to San Francisco. Pay for it in cash or don’t go. You may be a little sad about missing out on life today but in the long run you will be much happier and capable of doing anything you want at any time.

Why Saving For Retirement is Essential ?

I love my grandparents. They are amazing people who have experienced a lot in life. They have a huge amount of knowledge and they are always willing to share their thoughts and wisdom with me. What it challenging for me to understand though is why they live the way they do. They live on social security alone and have no other source of income other than assistance from the likes of me and my parents. They have no retirement saved, no pension, and no income generating investments. For people so seemingly wise it is hard to understand how they got to this point in their lives.

Social Security Really ?

They do come from a generation that expected social security to cover their retirement needs. When they were young saving for retirement wasn’t the most obvious thing to do. Not only that but their jobs didn’t provide pension benefits or any kind of retirement allocation. They were basically contract employees for the duration of their careers. They were truck drivers who operated as a team under one paycheck so nto only do they have no retirement savings or income but their social security checks are smaller than what you might expect.

Although this set of circumstances is not necessarily typical for working people today it does illustrate the importance of putting some financial responsibility on your own shoulders. You may think that you will be taken care of in your later life but you never really know what’s going to happen.

These days there are new hindrances to retirement savings. Many people in their early working years don’t believe that they ever will retire. They love their work and don’t see any reason why they would ever stop working. To some extent these people are on to something. If you love what you do then why would you ever need a huge portfolio for the day you stop working; why not just keep doing what you love until the day you die.

The problem with this logic however is that you never know when a set of life circumstances will keep you from doing the work you love. Any person is vulnerable to accidents and we are all susceptible to disease and health ailments. You can be doing the one thing in the world that you would never want to stop doing but if something happens to force you out of your profession and you have no retirement savings then you are going to be stuck between a rock and a hard place. You will have highly advanced skills that are no longer usable and you will have no experience in any field that remains available to you.

In the case of health problems you may not be able to o any work at all. What then? With no savings and little to no ability to work how will you survive?

In some ways retirement savings can be a lot like an insurance policy that can be cashed out at any time for any reason. You may not have disability insurance but if you can’t work for some reason other than disability then you still have money to draw from; your income source does not go away.

Imagine a scenario where you are beyond retirement age and your parents suddenly need full time care. Can you really continue working if you need to tend to them? Sure there are assisted living facilities but a retirement nest egg gives you the freedom and flexibility to chart your own path. You may not feel like you’ll ever want to stop working but when you are 70 you will want to have the option to stop working in case you need it. It’s like having a get-out-of-jail-free card in your pocket. It’s unlikely that you’ll need it but having it is more than worth it. It gives you peace of mind.

My grandparents are amazing people and I love them to death but I wish they had saved for retirement throughout their lifetimes. Their retirement years would be so much more enjoyable for them. As it stands now they don’t get out much, they mostly stay at home, and barely experience life. Their waning years are not being spent enjoying the world they live in – they are simply living each day in the most basic way possible and waiting to do the same the next day.

Start Saving Now !

Retirement savings is a bit like insurance and a bit like freedom. It opens doors of opportunity. Whether you take advantage of those open doors is another point all together but when you get old enough to retire you will want to decide for yourself if it’s actually worth it rather than let circumstances dictate what you can and can’t do with the rest of your life.

Carnival of Passive Investing #31 – June 2013 Edition

Thanks to Jacob A. Irwin for allowing me to host this edition of the Carnival for Passive Investing. Without much ado here is the Carnival

Here are the top picks for the Edition #31

Anton Ivanov presents Why Stock Market Timing Is a Waste of Time posted at Dreams Cash True.The sad truth is that market timing is largely futile. The vast majority of active traders fail to outperform long-term investing strategies that do not rely on timing the market. Many investors end up with large losses, loose their motivation and proclaim that stock market investing is dead.

PK presents Want to Be a Better Investor? Ask Your Wife! posted at Don’t Quit Your Day Job….Here are some hard facts that might blow a hole in your passive plan – even though men generally control the investing strings, women are better investors. Consider this evidence when coming up with your strategy!

JJacob @ My Personal Finance Journey presents Should You Include Emergency Fund and Specifically-Earmarked Savings in Your Overall Asset Allocation? posted at My Personal Finance Journey.Should savings that are earmarked for specific short/intermediate-term needs (vacations, buying a car, home down payment, college savings, doggie emergency fund, buying a new $3,000 bike, saving for a pool, saving for a rental real estate investment) and one’s emergency fund be included in your long-term asset allocation percentages? Or, should it be considered as a completely separate basket(s)? This post answers these questions.



Michael presents Mutual Funds vs. ETFs – Which I Prefer and Why posted at Financial Ramblings.If given the choice between an old school (open-end) mutual fund and an equivalent ETF, which would you choose and why? I remain partial to mutual funds. This article explains why.

Emily presents Trying Hard to Not Time the Market posted at Evolving Personal Finance.What should we do with some short-term investments? How do we divest without timing the market?

Jacob @ My Personal Finance Journey presents What Asset Allocation Level Should You Use for Treasury Inflation-Protected Securities (TIPS)? posted at My Personal Finance Journey.This post analyzes and answers the question: “what level, if any, of your portfolio should be allocated to Treasury Inflation-Protected Securities (more commonly referred to as TIPS)?”


Financial Planning

Is a Roth 401k Conversion the Right Decision For You? posted at PT Money.Different retirement account options are taxed in different ways. Because of recent legislation, it may be worth the change to a Roth 401k. Read Emily’s take on it and decide what is best for you

Chris Topher presents Innovation in Banks and Financial Institutions posted at This That and The MBA.Banks and financial institutions play a major role in the stabilization of the economy. The generic roles of banks are associated with managing growth, development, business operations, financial security and managing inflation. However, they do much more, far more than many people realize.

Bryce Fowler presents Do You Need a Financial Advisor? posted at Save and Conquer.As your investable assets get to some large amount, say greater than $1 million, many people start to wonder if they should hire a financial advisor. This article tells how to save money and handle your own investments using the 3-fund portfolio.

Dividend Growth Investor presents Dividend income is more stable than capital gains posted at Dividend Growth Investor.Dividend income has remained more stable than capital gains. Since 1977, the dividend income for S&P 500 has experienced declines in only 4 out of 34 years. As a result, it is no surprise that the predictable nature of dividend payment amounts is appealing to investors in retirement.

Mr.CBB presents How we quit comparing financial numbers posted at Canadian Budget Binder.Some people like knowing what their friends financial numbers are and other’s don’t. Are jealousy and envy one in the same? When you focus too much on what you don’t have you will continue not having anything at all or that you desire in life.

John Schmoll presents How to Invest in Stocks When You Do Not Know Where to Start posted at Frugal Rules.Investing in stocks, or anything in the market, can be overwhelming for many. The key to overcoming that fear is knowing where to start and educating yourself so that you can set up an investment portfolio that’ll help you grow your wealth and reach your long-term retirement goals.

Anton Ivanov presents Portfolio Planning Basics – Determining Your Risk Tolerance posted at Dreams Cash True.An important step in planning a winning investing portfolio is determining your risk tolerance. Knowing it will help you decide on an asset allocation that is right for your age and financial goals.

Hope you enjoyed reading the above submissions.

If you want to submit to a future Carnival of Passive Investing then  here is the link (Blog Carnival Workaround). For more information of the carnival here is the link Carnival of Passive Investing.

Also the next edition of the Carnival will be hosted at A Rich Life. Be there !