For most of 2018, I felt like we were finally getting out of The Great Recession’s lingering haze. For older members of my generation, it has been a solid seven-year run of favorable enough conditions to grab onto something we can call our own. Whether that's a steady job with benefits or a now profitable business (because no other steady jobs were available), we’ve come a long way from our college campuses and parents’ basements.
With December's drastic market sell-off stretching into the new year, it feels like the climate is shifting on us once again. The same storm clouds that floated over our heads at the start of our professional journeys cast their long shadows from an uncomfortable distance. It’s almost nostalgic, but not in a good way. The current environment is the product of both fatigue and uncertainty. Exhausted from finally digging our way out into the light of day. Worried about our futures being gambled more aggressively than ever before.
OK. Breathe. We'll be fine.
The truth is, my young professional clients and close friends don’t care about the value of their portfolios nearly as much as they care about the money that comes in each month to support their families, cover their liabilities and enjoy their lives. Most of us live and die by our incomes, so the more we rely on them to keep us afloat at any given moment, the scarier things will exponentially become when whispers of layoffs and pink slips float from cube to cube.
Without question, the most practical and resourceful tool in all of personal finance used to address these concerns is the cash reserve. It’s not as sexy or as deep a concept like investing or taxes, but nothing provides comfort in precarious times quite as liquidity does. Six to twelve would be ideal, but if you’re not holding at least three months of your living expenses in cash, I’d urge you to do what you can to make it a priority. If you don’t know what your monthly living expenses are, you have no time to waste in getting yourself organized.
This may be taboo, but please feel no shame if you consciously choose to sacrifice retirement savings to achieve this goal. Antiquated and unrelatable thinking will try to guilt you into believing that this would be a big mistake. That missing out on the wondrous effects of compounding interest will ruin your chances at achieving financial independence altogether. Indeed, compounding is wondrous and reducing retirement savings early on certainly won’t help things but, if the checks stop coming in, it‘s far less toxic than accumulating credit card debt or raiding existing retirement assets just to stay in the game.
Usually having time on one’s side lends itself to investing more aggressively or being better positioned to withstand short-term risks, but we shouldn’t allow our youthfulness and pride to fool us into thinking we’re immune to them. We shouldn’t forget to mitigate them when we can. No one is invincible and no one wants to experience the demoralizing loss that comes from failing to cover one's short positions in life. If your trajectory is high, I'd argue that you have little time to suffer setbacks of any variety.
Don’t mistake this as an ominous warning of things to come because, if you wait long enough, I promise you they will. The short-term risks I am talking about exist across all market conditions and during all phases of an economic cycle, not just when things get wild. Use this post to reflect on what you’ve built for yourself over the years and recognize what you need to put in place to keep your momentum from slowing down.
Douglas A. Boneparth is the Founder and President of Bone Fide Wealth, LLC, a boutique wealth management firm in New York City and Westfield, and co-author of The Millennial Money Fix. Contact Douglas to learn how he’s not your dad’s financial advisor.