Keep the food pyramid in mind for well-balanced financial planning.
By JJ Montanaro
Okay, I admit it: I still draw on my elementary school education. Occasionally, while I’m munching, with regret, on a greasy burger and salty fries, the old food pyramid works its way to the front of my consciousness. You remember, the one that used to have the grains, fruits, and vegetables and the good-for-you stuff at the bottom and the just plain good stuff up at the top? With a little tweaking, that pyramid holds some financial wisdom.
A Solid Foundation
How much time did you spend evaluating and buying your last trendy piece of electronics or, better yet, your last car? Chances are you’ve spent dramatically more time and effort on these low impact (yes, I know that football in HD is hard to beat) activities than you have mapping out your family’s financial future. When do you want to buy that first house and how much will you need for a down payment? How will your kids’ education be provided for- are you planning on Ivy League or community college topped off at an in-state public university? What does retirement look like, and what do you need to save to get there?
Your financial plan should tie all of these dreams together with an action-oriented, feasible roadmap on how to get there. Everything that follows should be a part of, or at least considered in, your plan, but with no plan to tie all the pieces together, you may very well be on a road to nowhere!
Harnessing What You’ve Got
You’ve got goals established in your plan, now you’ve got to find the right mix of savings tools and investments to make those goals a reality. Let me just talk briefly about four fundamentals that should serve as the cornerstone for your investment plan:
Diversification. The old adage not to have all your eggs in one basket still reigns true. A mix of various types of investments is at the heart of diversification. In today’s topsy-turvy world a diversified portfolio should also probably contained guaranteed investments.
Risk tolerance. If nothing else the last few years has taught us that the concept of risk is only partially captured by the notion that investments go both up and down. Risk means that you could lose substantial sums at just the wrong time. So don’t let me or any financial professional tell you that you must be invested in this or that percentage of stocks. Build your plan based on your own comfort zone. You may choose a conservative approach – just make sure your plan (yes, the one that ties everything together!) incorporates expected investment results that match your portfolio.
Time. The Rolling Stones crooned that time was on their side; make sure it’s on yours. Your timeframe should play a key role in how you save and invest. Next month’s mortgage payment or next year’s car down payment should never be in the stock market. In a nutshell, when investing for short time horizon goals like an emergency fund or next year’s vacation, consider investments that are stable and liquid. When goals are farther out, you can consider beginning to roll-in stocks, bonds, and other investments that don’t offer the same safety and stability as cash.
Taxes. Whether you realize it or not, the tax man lurks in the background as you make your investment decisions. I encourage my clients to focus on building a tax-diversified portfolio that offers current tax benefits (Thrift Savings plan contributions that reduce taxable income), future bennies (tax-free Roth withdrawals; some restrictions apply) and flexibility (no-strings attached non-retirement accounts). This type of approach will give you options, regardless of what happens with taxes and tax rates.
Keep your hands on the wheel
While I’m a major proponent of making much of what you do automatic and systematic, we can’t just put our plan on autopilot. Yes, invest in the TSP via payroll deduction; yes, add money to your emergency fund each paycheck; and yes, save for Johnny’s future college each month. No, don’t forget about periodically reviewing where you stand. Goals may change, markets will change, and your financial situation will require things be updated and amended, so make sure your plan is keeping pace.
J.J. Montanaro is a CERTIFIED FINANCIAL PLANNER TM practitioner with USAA Financial Planning Services, one of the USAA family of companies.