Navigating Financial Wellness

Question 1: Why should you have an emergency fund?

Answer: The importance of an emergency fund is highlighted best if you think of an unexpected expense arising in the absence of an emergency fund. Typically, these things have to be paid for, so where does the money come from? If there is no emergency fund, it generally comes from one of three places: 1.) it is paid for with a credit card, 2.) long-term investments must be liquidated to cover the cost, or 3.) the money is borrowed from a friend or a family member. All three of these situations can create friction in the personal finance picture. Suppose a significant and unexpected expense is applied to a credit card. In that case, you may have difficulty paying it off immediately, which can result in interest and penalty charges that accumulate and lead to longer-term issues (potentially even damaging your credit score). This scenario can create a negative spiral: accumulation of credit card debt (with interest), negative impact on your credit score, higher rates on future loans (or denials), the inability to capture the early years of compounding in your retirement savings, etc. This event can drag on personal financial growth for years to come and can often be mitigated with an emergency fund. Suppose the only option is to liquidate long-term investments to cover the cost. In that case, you may be forced into a situation where you have to sell those investments at an inopportune time, potentially resulting in either taking a loss on the investment or selling at a gain but paying capital gains taxes on the gain. Even if the situation is such that you can sell the investment at a gain, it still takes momentum out of the investment's potential return, thereby eroding some or all of its long-term growth potential. Even if the financial penalties, as measured in taxes or opportunity costs, are not seemingly severe, this situation has now resulted in relocating long-term investments to short-term needs, which, while hard to see, can result in a drastically different financial future than would have been attainable in a situation where a short-term savings account was there to backstop the unexpected expenses. Finally, borrowing money from a family member or a friend can bring its own set of complications. If not done correctly, the loan may be treated as a financial gift, with tax consequences. Even in the absence of those complications, a loan from a family member or friend can create friction in the relationship that could have otherwise been avoided. Each of these three scenarios can be avoided with an emergency fund. At the same time, there is no guarantee that you will not have an expense that exceeds your emergency fund. At least establishing such a savings account can significantly reduce the likelihood of being forced into a scenario like those outlined above. This is generally listed among the best first steps in building a financial plan, and for good reason. The emergency fund and the liquidity that it provides allow you to respond quickly to adversity in your financial life, help avoid situations that can have far-reaching adverse effects, and give you peace of mind knowing that you are prepared to respond to problems in the short term. This allows you to take the appropriate level of risk on your longer-term investments to achieve the growth you need to meet your goals. Many experts recommend a minimum liquid savings amount that could provide for three to six months of total expenses. While unanticipated costs (e.g., medical bills) can decimate a financial plan, job loss is one of the most common significant hardships. Our living expenses continue whether a paycheck is coming in or not, and they can quickly accumulate, leading to one or more of the adverse outcomes discussed above. An emergency fund that provides for three to six months of living expenses gives you time to reposition into another job. At this point, you can begin rebuilding your savings and continue pursuing your long-term financial goals.

Question 2: What are some tips to create a budget, and what can a budget do for your financial plan?

Answer: Creating a budget is like building a plan within a plan. Your financial plan, at a high level, likely requires certain projected savings rates to fund specific goals. Unlike investment returns, which are, in large part, outside of your control, your savings rate is very much in your control. While we can point to industry-wide savings benchmarks (i.e., saving at least 15% for retirement), achieving that savings rate consistently requires a plan for how you spend and save, which is, in essence, a budget. It is often a good approach to start with the essential savings goals and work backwards from there. If you were to save 15% for retirement and then 5% for shorter-term goals such as a down payment on a home or health savings account contributions, how much would remain afterward, and would that be enough to cover all your living expenses? If so, the rest should be simple: make a plan for how you will monitor and manage costs to ensure your savings rate remains stable and increases over time. If you are not able to save 20% of your income, consider reviewing your expenses to see if there is any room to cut back (subscriptions you don't really use or that could be renegotiated are a great place to start). If you are unable to cut expenses to meet the savings benchmark that is appropriate for you, consider starting with what you can save, and ratchet that up gradually over the subsequent years as your pay increases. While it is best to start early with retirement, it's better to start later than not at all. If you start with an amount below what you think is an appropriate savings rate but start early enough, you can gradually increase your savings to hit your goal within a few years. If you have a relatively long time horizon (to retirement), a few years will likely not be detrimental, and it is better to start with something than to do nothing. Many times, we fall victim to the fallacy, "If I can't save a meaningful amount, why bother at all?" Start with what you can, try to keep your standard of living constant as your salary increases, and funnel those raises into retirement savings. Let your investments compound and grow as you move into and through your highest-earning years. Implementing a budget is the plan within the financial plan that enables you to achieve your savings goals, which, in turn, will allow you to achieve your spending goals in retirement. It provides the structure needed to stay consistent and gives you the freedom to spend money where you want, knowing those purchases fall within your budget and do not threaten your long-term financial wellbeing.

Question 3: What does financial wellness mean to you?

Answer: Money can be the cause of stress, anxiety, and conflict. Unsurprisingly so, as it can play such a significant role in our lives. Building an emergency fund can bring peace of mind, knowing you are prepared for short-term expenses or an unexpected loss of employment. Knowing you are on track for retirement can relieve the burden of wondering whether you will have to keep working your entire life. Putting in place the appropriate insurance policies can provide assurances in the event of catastrophic medical expenses, property damage, or a premature death. Taking time to put together an estate plan and updating it as needed can reduce uncertainty about the disposition of your assets upon your passing. Financial stability can ease the stress of caring for a family, knowing that you can meet the financial needs of supporting a spouse or children. For most of us, the financial picture changes over time; money ebbs and flows throughout our lives. Financial wellness is the prudent management of the resources available to you at a given time, aligned with your views on risk and in consideration of your short- and long-term financial goals. Prudent management of anything generally requires discipline and planning. As with most things, it requires being intentional. It involves the effort of pausing to make a plan (i.e., budgeting, analyzing

investment strategies, establishing an estate plan, etc.). It requires discipline and consistency in executing the plan to achieve the goal(s). Many of us may not have a perfect financial picture, but almost all of us have at some point found ourselves saying how much better we feel just knowing that there is a plan in place. As is often the case with managing a poor medical condition, it may not be cured on the first day, but knowing that you and your doctors have a plan in place to get healthy is enough to change your outlook. Many objective measures of financial wellness are moving targets. They change over time and as the situation evolves. The best and most efficient way to continue checking those boxes is to have a plan and be disciplined about the actions we take today and tomorrow that fall within its objectives. Focus on what is within your control. Try to avoid viewing different aspects of your financial situation in a silo; instead, remember to look at each piece as part of the big picture. Reflect on how your investment decisions will have tax impacts, how your education funding goals may impact your retirement goals, how your insurance strategy plays into risk management and estate planning, and how your estate plan can impact your investment strategy. We tend to focus on the decision at hand and view it in isolation. Financial wellness requires acknowledging the interconnectedness of your personal financial situation, and having an accurate understanding of the relationships among those areas is essential for achieving overall financial wellness. Ultimately, the goal of all of this is to achieve a balance between our current standard of living and the one we aspire to in the future. Attainment of this balance will undoubtedly move you one step closer to this version of financial wellbeing.

Question 4: How does risk fit into my financial well-being?

Answer: Two words that most of us hear commonly paired together: risk and return. We have all, at some point or another, taken risks in the hopes of achieving some future return. It may have been an investment, or it may have come in the form of taking a new job or buying a home. Most things entail some level of risk, and we intuitively assess that risk and measure it against the anticipated future return. We generally move forward if we're comfortable with the risk associated with an anticipated future return. A rational person would not take a risk if they didn't need the return or didn't believe the projected return warranted the level of risk. Most of us invest our retirement assets in stocks or bonds with the hope that, through our savings and the returns on those investments, we can meet our goal of leaving the workforce (or reducing hours) to eventually spend more time with family or devote ourselves to hobbies. One of the most relevant factors in risk management is time: if the timeline to a liquidity need is undetermined (i.e., you might need to access the assets unexpectedly), it is likely most appropriate to take little to no risk. If the timeline is future-dated but still relatively short (i.e., 3-5 years away), a low to moderate amount of risk can likely be assumed. However, it is gradually pared back as the expected liquidity event approaches. Suppose the time horizon is long-term (i.e., 7+ years). In that case, those assets can likely be assigned a higher risk profile, with the expectation that growth will be maximized (within reasonable parameters). At the same time, any expenses between now and then can be covered with shorter-term assets.

For the average person, growth is a necessity during the accumulation years if the expectation is to retire at age 65 and live into their eighties. In this instance, you are preparing to fund your living expenses for 20 years or more. Often, risk needs to be an aspect of your overall portfolio, not just for retirement but throughout your life. Suppose you're planning to fund a retirement lasting 20+ years. In that case, higher-returning assets will likely need to play a role in your portfolio not only during the working years but also in retirement, allowing the growth achieved in your sixties to fund expenses in your eighties. The critical piece of managing risk lies in taking on enough to accomplish the return necessary to sustain your long-term goals, while avoiding unnecessary levels of risk when the same goals could have been attained with a lower risk profile. Knowing this is one thing, but implementing and managing it over time is the part that generally requires a higher level of expertise. It is advisable to work with a professional who can assess risk in the context of the overall financial picture and help find a balance between apparent risks, such as systematic risk, and less obvious risks. Often, when we consider risk, we think of securities that could lose value, but other risks can easily be overlooked. Are your investments achieving enough return to grow your savings in consideration of inflation? Or are they actually losing purchasing power over the years? You may feel like a CD portfolio is about as low-risk as you can get, but is it generating a positive return net of inflation? Is liquidity risk a concern? If you had to access those assets, would it be worth paying a penalty to break the CD before maturity? Similarly, a bond portfolio is on the lower end of the risk spectrum. Do you know how the portfolio is positioned to respond to changes in the interest rate environment? Could allocating even a small percentage of those assets to equities reduce risk through diversification? How much specific risk (i.e., undiversified risk) is advisable to maintain? A qualified advisor can assess risks and recommend a solution that aligns your risk profile with your risk tolerance and return objectives. Oftentimes, it is appropriate to ask a professional for a reasonable projection of future returns and a model showing potential market-value fluctuations in a "worst-case-scenario" scenario. These exercises align the two highly competitive goals: preserving wealth and growing wealth.