A Financial Planning Multi Vitamin for Your Financial Health
Despite your best efforts, it’s difficult to eat a truly balanced diet.
Due to your personal genetics and how your body handles certain foods, you may supplement your diet with a multivitamin designed to give you some added vitamins and minerals that may be lacking in your normal diet.
These might include Vitamins A, C or D. It might also include things like potassium and magnesium.
I wondered recently . . . what if there was a financial planning multivitamin? What would it contain and how would it help you?
I think our financial vitamin would start with a healthy dose of Vitamin P. Vitamin P is for planning.
While many people think of financial planning as an exercise for wealthy people, nothing could be further from the truth.
Whether planning a road trip or a vacation, I imagine you don’t jump in the car and start driving in the hope that you wind up where you want to go.
Perhaps you’re familiar with the conversation between Alice and Cheshire Cat in Lewis Carroll’s Alice in Wonderland:
“Cat: Where are you going?
Alice: Which way should I go?
Cat: That depends on where you are going.
Alice: I don’t know.
Cat: Then it doesn’t matter which way you go.”
Planning (via Vitamin P) is nothing more than thinking about and charting a course for your future. It’s about being deliberate and purposeful in your financial decision making, today in the future, in the larger context of your values, your goals, and your life.
Yep, definitely 100% of your recommended daily allowance of Vitamin P.
OK, what else? How about some Vitamin C?
Vitamin C is for “cash.”
Recent research indicates most Americans can’t cover an unexpected $500 expense. You should have a cash reserve or an emergency fund handy to cover unexpected expenses instead of having to rely on credit cards or other debt.
One solution to up your intake of Vitamin C is to set aside 3–6 months of living expenses in a safe, liquid account where you can access if you need to but won’t touch it otherwise. And if you have a less stable income because you’re a commissioned salesperson or you own a business with variable income, you might want 6–12 (or more) months of expenses in your “Vitamin C” cash reserve account.
Next up, Vitamin P2.
Vitamin P, you’ll remember, is for planning. And Vitamin P2 is for “protection.”
Let’s say something happens to you and you’re no longer able to earn a living and support yourself or your family. This could be a result of death or disability.
What about the things you own like your home or your car? You need to protect them from damage, whether caused by you or someone else (including Mother Nature).
Even if you don’t own a home and you rent, you need protection in the form of renter’s insurance to cover the contents of your apartment. Other types of protection might include an umbrella of liability coverage, long-term care coverage, and more.
Most often, Vitamin P2 is addressed with insurance. But your Vitamin C cash reserve can help with those deductibles if you have claim.
I don’t sell insurance of any type. But I own it because I want to protect myself, my wife, and our property from unexpected circumstances.
The next important ingredient in our financial multivitamin is Vitamin C2. This covers your cashflow.
Many less reputable financial vitamin manufacturers would use Vitamin S (savings) instead of Vitamin C2, but simply focusing on savings can be problematic.
Savings is great, but it should be balanced among the rest of your life. And lifestyle.
Rather than the common advice to skip your Starbucks and save as much as you can, even if it’s a dollar here or a dollar there, why not negotiate for more income? Here are 4 tips for negotiating a better salary from Chris Voss, the former FBI Lead International Kidnapping Negotiator.
It’s not just about absolute savings, it’s about savings relative to your income. And you can have more influence over your income than you might realize.
Plus, if you focus on boosting your income, you can boost your savings and still enjoy your Starbucks.
Now we need some Vitamin T. The “T” is for time.
The earlier you start your financial vitamin regimen, the better. But you also need to recognize the impact of time on your financial planning decisions.
Do you want to take less investment risk or reduce your current savings? You may be able to do so and still reach your ultimate goals, but it will just take a little more time in the form of delaying retirement an extra couple of years.
Or what if you can’t wait to “take this job and shove it,” as the old Johnny Paycheck song goes? Your shorter time horizon until retirement might call for more savings, more risk, or adjusting one or more other goals in some fashion.
Time is important in your financial planning and decision making, so it’s a natural ingredient in our multivitamin.
A couple more and we’ll have a potent prescription for your financial planning success.
Next is Vitamin E for “expense.”
Minimizing your financial and investing expenses can have a HUGE impact on achieving your goals.
And while you should understand and be able to quantify ALL the costs associated with your investment portfolio and any advice you may be receiving, it doesn’t stop there.
You should also look at the costs associated with your bank accounts and other financial relationships you have. These costs can be explicit, where you actually see a charge hit your account. Or they can be implicit, such as accepting a 0.01% interest rate from one of the big banks when you can easily achieve a much higher interest rate through a credit union, community bank, or online bank.
Costs matter, yet you’d be amazed at how many people I meet that don’t have a full understanding of all the costs associated with their money and investments.
Now if you’re looking at your expenses, including those tied to your investment portfolio, that leads to Vitamin D: diversification.
Warren Buffett says, “Keep all your eggs in one basket, but watch that basket closely.” While you can’t argue with Mr. Buffett’s financial results, I disagree with him on this point.
I think you should spread your financial eggs around to many different baskets. If something happens to one basket, it will have little impact on the rest of your eggs.
The downside of diversification — and why Buffett made the statement above — is that in a market where something is doing really, really well, your results will be dampened. That’s because while you might own what happens to be “hot” at the moment, you own a small proportion relative to your other investments.
But research shows that the fear of a financial loss is twice as powerful as the pleasure of a gain. So I think diversification is the best long-term approach. It’s how I invest personally, and it’s what I recommend to my clients.
Thus far, our financial planning multivitamin includes:
- Vitamin P — Planning
- Vitamin C — Cash
- Vitamin P2 — Protection
- Vitamin C2 — Cashflow
- Vitamin T — Time
- Vitamin E — Expense
- Vitamin D — Diversification
I’m sure there are other trace vitamins and minerals that we could add to our financial multivitamin, but many of those will likely be highly dependent on your personal situation including your values, goals, and priorities.
I believe it’s important for you to consider all the aspects, or ingredients, to successful financial decision making. All too often, people focus solely on investing or saving money or insurance in isolation.
But it’s a holistic approach that considers all these financial elements and their relation, interaction, and impact on each other that leads to successful financial planning.
And better overall financial health.
Don’t forget those vitamins.
Learn more about our Financial Planning services for women.
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Minimum Viable Financial Plan
The Financial Planning Process: How You Can Prepare for the Road Ahead
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The Importance of Lifestyle Financial Planning
Lifestyle Financial Planning Fundamentals