Where Are You Now, Financially?

Last time I shared with you the 3 questions to ask yourself BEFORE you start investing. Yes, financial success requires CLARITY and INTENTION. Today we’re going to dive deeper into the first question…

Where are you now, financially?

To answer this question, you’ve got to answer the following 5 questions (yes, asking the right questions is the key):

  1. Do you have outstanding high-interest debt?
  2. Do you have an Emergency fund account?
  3. Will you need the rest of your money in the next 5 years?
  4. Do you know what ‘asset allocation’ and diversification mean?
  5. What Is Your Risk Tolerance?

 

Let’s look closer at each of these questions together, then you’ll do your own financial assessment. Ready?

 

  1. Do you have outstanding high-interest debt?

 Your ROI (return on investment) will depend on several factors like the kinds of assets you invest in (aka asset allocation), market performance, economic environment, etc.  In this low interest rate environment, making on average 7-8 % over longer time period (from now to your retirement) is considered a pretty good ROI.

 

So, if your hypothetical investment has an ROI of 7-8% but the debt that you carry (e.g. credit card debt, lines of credit, etc.) is higher than 7-8%, then it would be very smart for you to pay off the debt before you consider any investment. Interest accrued by the outstanding debt most likely will surpass potential interest earned from investing!

 

It doesn’t make sense to pay more to carry your debt than what you would earn by investing your money. Agree? Use the money to pay off you high-interest debt (mortgage rates are usually lower than your average ROI) before you consider ANY investment.

 

  1. Do you have an Emergency fund account?

An emergency fund (or 911 or SOS fund) is ‘safe money’ that you accumulate and keep in a bank account. This is money that would ‘have your back’ should unexpected hurdles happen – you lose your job, your business has cash flow problem, your house needs urgent repairs or you incur a significant medical expense.

 

The key here is to keep your money SAFE (in cash or treasury notes). If you have to deep into this fund to pay for urgent financial needs, make sure you re-fill this fund asap before you start investing. Even if you are paying off your high-interest debt, I highly recommend that you contribute some percentage (e.g. 10 %) of your income toward your savings.

 

How much should you keep in your Emergency fund? Great question. My answer is the usual – It depends! I recommend to keep at least 3-6 month worth of your living expenses. The rational for 3-6 month is because it may take that much time for you to get a new job or fix the problem with your business.

 

Personally, I like to keep up to 12 month in my emergency fund. If you invest without having the ‘safety net’ and will need money for urgent needs, you will be under tremendous stress because you will need to liquidate your investments in a hurry and, possibly, take a loss on your long term (5 years +) investment.

 

I see investing as a great tool to augment wealth but I will never play with my safe money on the market.

Make sense?

 

  1. Will you need the rest of your money in the next 5 years?

Investing in the stock market works best when you are willing to stay in the game for a longer period of time. Most of the time, day trading or short-term investing is not profitable and you hardly get any income from the dividend-paying stocks.

 

Therefore, before you start investing, I suggest that you have a clear idea that you will not rely on these money for at least 5 years or so. I don’t believe that you should invest in the stock market the money that you may need within next 2-5 years.

 

Stock market investments go up and down and you need to be able to ride the market trend! It’s hard to time the market, even for professionals. You don’t want to be forced to sell your investment at the worse time!

 

Besides, stock market in general usually comes back in a long term. In 2007 the market was hot in the US, then in 2009 the stock market as well as real estate market in the US tanked.  Both recovered in a few years and kept rising but you would have to stay invested in the market to wait for the recovery.

 

You don’t want to be in a position when you have to sell your investment – you want to buy low and sell high, not the other way around, agree?

 

That’s why your money for short-term (less than 5 years) goals (e.g. a down payment on your new house or college tuition or car purchase) should be held in a saving account, money market account, or treasuries (e.g. treasury notes or bonds).

 

  1. Do you know what ‘asset allocation’ and diversification mean?

Frankly, it’s not enough to ‘want to invest’. You can’t just jump into the stock market – you need basic financial education. Besides, you should NEVER invest all your investment funds in the market. You want to invest strategically and wisely. I am talking about being clear how to diversify and allocate your investment money.

 

Diversification and asset allocation are two important risk management factors you must be aware of. And to determine the right asset allocation for your financial situation, you must get clarity about your financial goals, your investment time-frame, your risk tolerance and preferred investment assets (e.g. stocks, bonds, mutual funds, exchange-traded funds, real estate, precious metals, business ownership, etc.).

 

These specific factors can be discussed with your financial adviser and they will help you determine how to diversify your money among various investment choices.

 

  1. What Is Your Risk Tolerance?

This question is a ‘gut check’: If you’re a person who’s uncomfortable with ANY level of risk, investing might not be for you. ANY investment involves risk. You can choose to be conservative with your investments if your main objective is to preserve your principal or choose more risky investments that that have higher returns.

 

How would you feel if the value of your investments went down a little? And what if it drops a lot and stays down for a while? These are real possibilities you must be aware of and not lose sleep over.

 

I like to say that you should invest at your ‘sleep well’ point, meaning chose the investing options that would allow you to keep peace of mind.

 

BOTTOM LINE:  SAVING is planting the wealth seeds. Investing is the fertilizer to help your wealth grow faster. While the fertilizer is optional, seeds are not. Whenever you get ready to start investing your money, do it in a way that you won’t lose sleep over it.

 

Your investment portfolio must reflect your long term goals and risk tolerance, which usually change with time. If you’re not comfortable with investing now, no worries, take your time to educate yourself first! Yes, investing is very important, but it’s even more important to get your financial house in order first.

 

And if you want to brainstorm your specific financial situation and see what steps you can take immediately to start moving toward to YOUR financial goals, schedule a strategy session with me to get you going.

 

To Your Health, Wealth and Freedom!

With Love and Gratitude,

 

About the Author Millen Livis

Millen is a Wealth architect and Financial Independence Coach, entrepreneur, and a bestselling author. Being a Possibilities’ Catalyst, she uses her intuition, business, and investment expertise to support entrepreneurial women (like you) who want to master their money, live their purpose achieve financial prosperity and freedom. With her physics and business education, corporate and entrepreneurial experience, money management know-how, mindfulness practices and transformational coaching skills, Millen has a unique ability to guide and support clients in achieving extraordinary success in their lives.

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