Douglas A. Boneparth is a Westfield resident and Founder of Bone Fide Wealth, LLC, a boutique wealth management firm in New York City, and co-author of The Millennial Money Fix. Contact Douglas to learn how he’s not your parent’s financial advisor.
Investing has never been easier. Today, there are more than 200 robo-advisors in the U.S. From platforms that invest “rounded up” purchase amounts on your behalf to applications that offer unlimited stock trading right from your phone. What was once reserved for only the rich is now accessible to everyone. But as the saying goes, “Just because you can, doesn’t mean you should.”
The famous showman P. T. Barnum once said, “The foundation of success in life is good health: that is the substratum fortune; it is also the basis of happiness. A person cannot accumulate a fortune very well when he is sick.” In addition to being a world class promoter, Barnum understood long term success stems from having a strong foundation.
This is especially true when it comes to investing. Without first establishing a strong financial foundation, investing is nothing more than putting the cart before the horse. And just like a driver without a license has no business operating a vehicle, an individual with no financial foundation has no business investing a single dollar.
Earning the right to invest is a system for anyone interested in building a strong financial foundation. The underlying concepts aren’t necessarily new, but I’ve laid them out in a way which hopefully gives people a better chance of taking control of their financial life. Here’s how it works.
Identify, Quantify and Prioritize Your Goals
Knowing what you want for yourself is not as easy as you think. It requires a great deal of maturity and emotional honesty. Complicating matters is our desire to want more than one thing at once. Therefore, we need a way to organize and think about our goals.
First, identify your goals. Identification tells you what you want. Write them down. Make them real.
Second, quantify your goals both by time and value. Quantification tells you when you want to achieve a certain goal and how much it will cost.
Third, prioritize your goals from most important to least important. Prioritization tells you where to direct your first and last dollar of available savings.
Master Cash Flow
Mastering cash flow is striking a balance between lifestyle and savings. To achieve this balance, you need to understand where your money is going. Without knowing how you spend your money, you won’t stand a very good chance of consistently saving it.
The best way to understand spending behavior is to review and categorize an entire year’s worth of expenses. It’s tedious and time consuming but knowing exactly where your money goes puts you in the position to then create budget that’s based on what you know rather than what you think.
Once you intimately understand your spending habits, go live your life. At the end of each month, reconcile your expenses against what you’ve budgeted. Repeat this process until your able to consistently save and meet your budget.
Mastering cash flow takes time and practice, so stick with it. Most people are too willing to give up after just a few months, never gaining the discipline necessary to identify a lifestyle that also allows roof for consistent savings. Don’t give up.
Cash Reserves and Short Term Goals
You’re almost ready to invest but before you do, we need to address short term risks.
A cash reserve is a financial cornerstone that provides more peace of mind than any investment ever will. Life is fickle so having sufficient liquidity mitigates the risk that life’s little bumps won’t take you off the pathway to our goals.
While goal priority will determine how important establishing a cash reserve is to you, I recommend it make it towards the top of your list. There’s no premium quite like having peace of mind. Three month’s of living expenses in cash is good, but six months is better.
Lastly, any goal with a time frame of four years or less should be saved as cash. There’s simply no reward attractive enough for you to risk losing your principal in such a short period of time. One of the worst things that can happen when working toward a goal is being just inches from the goal line only to have the goal posts moved further away because you chose risk over certainty.
Earning the right to invest might not be as easy as enrolling in the latest investment application or as thrilling as participating in the next tech unicorn, but it’s a practical approach to building a strong financial foundation. It’s not what most people want to hear and, sadly, it’s not what most people are willing to do, but it’s what’s necessary to take control of your financial life and achieve your goals.
In the spirit of making the world a more financially literate place, I’ve created a FREE set of materials to help anyone earn their right to build a better financial life for themselves.