Celebrating Financial Wellness Month

Navigating Financial Wellness: Tips from your First Financial Trust Team

Achieving financial wellness involves thoughtful budgeting, smart saving, and informed investment decisions. Knowing where to start can often be the hardest task when it comes to managing finances. It is important to take a holistic, or comprehensive, view of your finances to build a secure foundation and ensure a path of long-term prosperity. 

Many questions may come to mind when embarking on your financial wellness journey. Whether you are just getting started or several years in, below are common financial considerations brought to you from the experts at First Financial Trust.

Article Written By:

Grant Seabourne, CFP®, CTFA
Vice President, First Financial Trust

Q: Financial wellness is a vague term...What does it mean to you?

Money can be the cause of stress, anxiety, and conflict. Unsurprisingly so, as it can play such a significant role in our lives. 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 could be viewed as the prudent management of the resources available to you at a given time, done in such a way that aligns with your views on risk, and in consideration of your short and long-term financial goals. It requires 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 of the objective measurements of financial wellness are moving targets. They change as time passes and as the situation changes. The best and most efficient way to continue checking those boxes is to have a plan and be disciplined about the actions that we take today and tomorrow that fall within the plan 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 acknowledgment of the interconnectedness of each aspect of your personal financial situation, and having an accurate understanding of the relationships between those areas is important in achieving overall financial wellness. Ultimately, the end goal of all of this is to achieve a balance between our standard of living today, and the one that we aspire to have in the future. Attainment of this balance will undoubtedly move you one step closer to this version of financial well-being.

Q. What are tips for creating a budget and what can a budget do for your financial plan?

Creating a budget is like building a plan inside of a plan. Your financial plan, at a high level, likely requires certain projected savings rates in order 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), the task of accomplishing that savings rate consistently requires a plan for how you spend and how you save, and that is in essence, a budget. It is oftentimes a good approach to start with the important savings goals and work backwards from there. If you were to save 15% for retirement, and then perhaps 5% for shorter-term goals such as a down payment on a home, or health savings account contributions, how much remains afterwards, and is that enough to fund all of your living expenses? If so, the rest should be simple: make a plan for how you will monitor and maintain expenses to ensure that your savings rate remains stable, and potentially increases over time. If you are not able to save 20% of your income, consider going through your expenses to see if there is any room to cut down (subscriptions that you don’t really utilize or that could be re-negotiated 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 when it comes to 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 you start early enough, you can gradually increase your savings to start hitting 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 hold your standard of living constant through your salary increases, and funnel those pay raises to retirement savings. Let the investments compound and grow as you move into and through your highest earning years. Implementing a budget is the plan inside of the financial plan that enables you to achieve your savings goals, which will one day enable you to achieve your spending goals in retirement. It provides the structure needed to be consistent, and it gives you the freedom to spend money where you want to, knowing that those purchases fall within the boundaries of your budget, and do not pose any threat to your long-term financial wellbeing.

Q: Why should you have an emergency fund?

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? In the event that 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. If a significant and unexpected expense is applied to a credit card, it is possible that you have difficulty paying it off immediately, which can result in interest and penalty expenses, which can 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 to your credit score, higher rates on future loans (or denials), the inability to capture the early years of compounding in your retirement savings, etc. If the only option is to liquidate long-term investments to cover the cost, 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 financial penalties as measured in taxes or opportunity cost 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 were 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 properly, the loan may be viewed as a financial gift, which can have tax consequences. Even in the absence of these 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 circumvented with the presence of an emergency fund. While there is no guarantee that you will not have an expense that is in excess of your emergency fund, at least establishment of such a savings account can significantly decrease the probability of being forced into a scenario such as the ones outlined above. This is generally listed as one of the best first steps in building out a financial plan, and it is for good reason. The emergency fund, and the liquidity that it provides, allows you to respond quickly to adversity in your financial life, it helps avoid situations that can have far-reaching negative effects, and it gives you peace of mind knowing that you are prepared to respond to problems in the short-term. This allows you to then take the appropriate amount of risk on your longer-term investments to get 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 there are some unanticipated expenses (i.e. medical bills) that can decimate a financial plan, one of the most common significant hardships is due to job loss. Our living expenses continue whether a paycheck is coming in or not, and those expenses can quickly accumulate and result in one or more of the negative 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 which point you can begin to rebuild your savings and continue the pursuit of your long-term financial goals.

Q: How does risk fit into your financial wellbeing?

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 a given level of risk for an anticipated future return. A rational person would not take a risk if either he or she 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 hopes that, between our savings and the return on those investments, we can meet our goal of leaving the workforce (or pulling back on hours) to eventually spend more time with family or dedicated 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 that little to no risk is taken. If the timeline is future-dated, but still relatively short (i.e. 3-5 years away), it is likely the case that a low to moderate amount of risk can be assumed, although gradually paired back as that expected liquidity event approaches. If the time horizon is long-term (i.e. 7+ years), it is likely the case that those assets can be assigned a higher risk profile, with the expectation that growth will be maximized (within reasonable parameters) for those assets, knowing that any expenses occurring 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 your eighties. In this instance, you are preparing to fund all of your living expenses for twenty years or more. Oftentimes it is the case that risk will need to be an aspect of your overall portfolio not only to retirement, but through it. If you’re planning to fund a retirement of twenty plus years, it is likely the case that higher-returning assets will need to play at least some role in your portfolio for not only the working years, but through the retirement years, allowing the growth achieved in your sixties to fund expenses in your eighties. The important piece of managing risk lies in taking on enough to achieve the return necessary to sustain your long-term goals, while not taking on 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 generally advisable to work with a professional who can assess risk as it relates to the holistic financial picture, and help find a balance between the apparent risks, such as systematic risk, and the less apparent risks. 

Oftentimes when we consider risk, we think of securities which could lose value, but there are other risks that 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 it if there is a penalty to break the CD before maturity? Similarly, a bond portfolio seems to be on the lower end of the risk spectrum, but do you know how the portfolio is positioned to respond to changes in the interest rate environment? Do you think allocating even a small percentage of those assets to equities could actually reduce risk due to the diversification benefits? How much specific risk (i.e. undiversified risk) is advisable to maintain? A qualified advisor can assess risks and recommend a solution that brings the risk profile in line with your risk tolerance and your return objectives. Oftentimes it can be appropriate to ask a professional for a reasonable projection of future returns, and for a model showing potential market value fluctuation in a “worst-case-scenario” situation. These exercises can help align the two highly competitive goals: the goal to preserve wealth, and the goal to grow wealth.