The population of 30-to-44 year-olds in the U.S. will rise by more than 2 million over the next five years. As they begin to experience the benefits of growing income, many in this group will buy homes and cars and maybe even start businesses at a higher rate than our economy has experienced over the past several years coming out of recession.
While many of them are focused on building the career, family and lifestyle they want, they may ask themselves many short-term questions dealing with the here and now of living life. But it’s also important that as more discretionary income enters their budget, they are diligent in asking themselves long-term-oriented questions about how they can best pursue financial security. For each extra dollar they can save, what is the best use of it?
Since most people spend more time assessing their vacation options each year than assessing their finances, many will fail to ask themselves these important questions at a critical time when they can shape their finances for the rest of their lives.
Hopefully everyone already considers the basic questions of personal finance: Am I living below my means? Do I have a cash reserve for emergencies or unexpected expenses? Am I making the best use of my employer-provided benefits? Is my family protected if I die or can no longer work?
When these questions are addressed, it’s time for a series of questions that aren’t asked often enough or answered thoroughly enough. If these questions aren’t simply answered by personal knowledge, they should not be skipped. Consulting peers, parents and advisers may be very valuable at this stage.
Am I spending more than I can afford on house, car or starting a business? With low interest rates, it’s tempting to take on more debt than may be wise. These big-ticket purchases are more troublesome for your budget than a latte-a-day habit or more shoes than you need.
How do I want to live in retirement, and what will it cost? Until you have a sense of this, it’s difficult to know exactly how much you need to be saving now in order to achieve the goal. Begin with at least a rough idea of the end in mind and you’ll have a better idea how to course-correct along the way if needed.
Am I passing up free money? If your employer offers a matching contribution to your retirement savings, you must find a way to contribute enough to earn it. This free money, put to work in your retirement account, can have extraordinary growth potential that makes it far more valuable in the future than it is as a small percentage of each paycheck today.
Do my investments reflect my tolerance for market fluctuations and my expectations for long-term returns? Most people have a collection of investments rather than a defined investment strategy. When you look at your investments across all accounts (perhaps your spouse’s as well), how well do you understand the risk vs. return characteristics of these investments? Do you have a stated strategy with targets for stocks vs. bonds, U.S. vs. international investments and methods for rebalancing accounts so that you don’t accidently stray over the roadside cliff?
How will I react if money decisions don’t work out in my favor? Your behavior around spending, saving and investing decisions may be more influential on your financial security than the actual returns earned by your savings and investments. Manage your behavior, or work with an adviser to help you, and you’ll likely be more successful than your peers who succumb to human nature and its counterintuitive influence on your money decisions.
If making investments in individual stocks or any narrow idea, do you know more about this investment than everyone else? More than the person on the other side of the trade who is just as willing to sell as you are to buy? Know what can go wrong just as much as what may go right.
Am I paying too much attention to past investment performance and current “news”? Chasing (recent) past performance and being too responsive to short-term moves in the market driven by the news of the day are problematic.
Remember that in short periods, luck will have a significant influence on any investment outcome. Over time, with sound planning and answers to questions like these, you’ll remove much of the luck from the equation.