I think most of us can agree that 2022 has come around fast, despite the struggles of 2021. It’s been a pretty wild ride and the world remains uncertain, but that doesn’t mean your financial situation has to. January provides an excellent opportunity to identify proactive ways to start the year off right by saving (and investing) more.
You're paying off a mortgage. Your car needs new tires. You're dreaming of starting a new business. But you also really want to take a vacation. How can you possibly save for multiple goals at once? Where should you even start?
Just Start… Right Here, Right Now
When my clients have a surplus of cash on hand and want to save, they often need help identifying the different account types to consider. Prioritizing across accounts can also be complex and overwhelming. How can they smartly invest once they do identify the right account?
- Received a bonus or a raise or started a new job
- Sold a business or have excess cash in your business
- Anticipate a tax refund or received a gift
- Made a resolution to consider ways to save more of your income this year
With so many choices and so much jargon, it can paralyze most people into in-action. Or worse, they default to spending extra cash without intention.
You can choose to be intentional and live life by design, not by default. Simply break the process down into these three simple steps.
Step One: What Kind of Savings Do You Need and When Will You Need the Money?
Personal finance truly is personal. Depending on your family values, you may classify your savings differently.
Here are three basic types of savings:
- Foundational Savings: Provides enough immediate cash to survive unforeseen calamities and can allow you to enjoy a sense of security.
- Fun Life Goals Savings: Makes your life worth living in the immediate future and can help you take new risks or try new things.
- Future Self and Legacy Savings: Allows your future self and family to have the same great lifestyle you enjoy today.
There really are no rules in terms of how this works out for you personally. College savings may be Foundational for one family and Legacy for another. Depending on their age and history, a client may consider “health savings” as Foundational, and another may consider it Future Self.
Step Two: How Do You Prioritize Your Savings?
Prioritizing where you put your savings is one of most important financial planning decisions you can make, and there is a certain amount of “cognitive dissonance” you must navigate:
- If you try to afford too many things at once (and ignore Foundational Saving), it’s easy to wind up in debt.
- If you focus too intently on Fun Life Goals (like vacations, cars, or home improvements) you may go for years living in relative comfort, only to find your Future Self with regrets about how long you must continue to work to earn an income.
- If you put all your money towards your Future Self (and never spend money on any Fun Life Goals) you run the risk of not knowing how to enjoy any of the money you’ve worked so hard to earn and save.
- If you consider only Legacy savings, you may miss out on the opportunity to see the impact of your generosity while you are still above ground.
How you prioritize your savings is also a function of your values.
Most people (in fact the vast majority) try to “feel” their way forward in step two. They are motivated to act but struggle to find the right balance between security and fun. Rather than feelings, if you can add discipline and automation in this step, you are more likely to be successful.
Step Three: How Do You Invest Your Savings?
This is where I find most people get stuck. This is because there is no perfect answer Google can give you. It depends on your values, goals, and circumstances. Rather than bore you with a long explanation about the right way to invest each account, I will tell you a few common mistakes made at this step:
- Stressing over finding the “best” savings or money market account rather than focusing on the right amount of savings.
- Fear of making a mistake when investing Retirement savings and therefore investing too conservatively or not investing at all.
- Thinking that Future Self savings should be invested in the same way Foundational Savings should be invested.
- Optimizing for return instead of managing risk.
How Can You Get Started?
I’ve created a helpful checklist that provides a structured outline to help identify available and appropriate saving strategies. You can download your free copy here.
While the checklist can help you identify different opportunities, I am happy to meet with you to determine what options best suit your unique circumstances. Book a complimentary 30-minute discovery call to have all your questions answered right away.