Turning on a Dime
WE MAKE FOREVER PLANS—and often end up shredding them in a few short days.
Think of the folks who hike their portfolio’s allocation to stocks, only to turn tail when the next market downdraft reminds them of their true risk tolerance. Or the families who are forced to move because of a job change, or the arrival of children, or the need to help aging parents. Or me, who thought he might have 30 more years, but instead may have just one.
It's important to be financially resilient, able to stand our ground in the face of market turmoil, big medical bills, layoffs and more. This, of course, is the reason for ample savings and a variety of insurance policies. But in addition to this financial resilience, it’s also crucial to have financial flexibility, in case we need to tear up those forever plans. What does that mean in practice?
First, we should favor assets that are easily sold, or “liquid” in Wall Street speak. This is a reason to avoid things like private partnerships, second homes, rental real estate, car leases and cash-value life insurance, where selling can be slow and exiting can be costly. Last year, Elaine and I twice found ourselves intrigued by the idea of a second home. Thank goodness that never went beyond daydreaming, given my recent diagnosis.
Second, we should have at least some money in a regular taxable account, rather than stashing everything in retirement accounts, where early withdrawals can mean tax penalties. That said, between 401(k) loans, the ability to withdraw Roth IRA contributions at any time, and the many exceptions to the 10% early withdrawal penalty, retirement accounts are increasingly a low-commitment proposition.
Third, we might earmark part of our regular taxable account for financial emergencies and then stash that money in conservative investments, though—to be honest—I've never had a separate emergency fund. Early on, when I was a lowly reporter with a graduate-student wife and two young children, setting aside three-to-six months of living expenses for financial emergencies seemed far beyond what I could possibly afford. I eventually amassed a decent sum in my taxable account, but I viewed that money as part of my long-term investment portfolio—money which, in a pinch, I could always dip into to pay unexpected expenses.
Fourth, we should aim to keep our fixed living costs low. This is a notion I regularly mention: The lower our fixed living costs—think mortgage or rent, utilities, groceries, property taxes and insurance premiums—the more money we’ll have available each month for savings and for discretionary “fun” expenses. Equally important, we’ll be better able to cope financially with unexpected life events. Indeed, I believe perhaps the biggest contributor to my financial success was living for two decades in a house that was far less expensive than I could afford, thus freeing up ample sums each month for savings.
Fifth, we should ask whether we’re betting too heavily on a future that may not happen. For instance, do we keep much or all of our portfolio in the stock market, ignoring the risk—however small—that a surprise need for cash could coincide with a brutal bear market? In the name of caution, perhaps we ought to keep a little more in bonds or cash investments, or maybe set up a home-equity line of credit as a backup source of cash.
Finally—and despite that last suggestion—we should be leery of leverage. Have we bought an overly large home or a vacation property, assuming the big mortgage involved will be easily handled because our job is safe? What if we’re wrong about our job? Such things would reduce our financial flexibility and could put our financial resilience at risk.
So, has my diagnosis prompted me to tear up my forever plans? Yes and no. As I discussed a few weeks ago, I’ve recently taken countless small financial steps, though most of them are designed to make things easier for my heirs. Meanwhile, for now, the big stuff remains the same. I have no intention of unloading my house, and I’ve yet to make any changes to my portfolio’s asset allocation.
Perhaps such steps would be necessary if I didn’t have health insurance or I wasn’t still earning enough to cover the bills. What if I live longer than I expect and need to dip more heavily into my portfolio? Fingers crossed, I already have enough in bonds to cover a few years of expenses—and those bonds take the form of easily sold mutual funds.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X @ClementsMoney and on Facebook, and check out his earlier articles.The post Turning on a Dime appeared first on HumbleDollar.
