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wealth management

The Rules of Financial Balancing

Achieving financial balance is no easy feat, but it provides countless benefits to your life in personal finance and beyond. Following the rules of financial balancing helps reduce your reliance on your paycheck and removes the fear and uncertainty that comes with living in debt or living hand to mouth.

Follow these basic rules to help get your financial house in order and start moving towards true financial freedom:

Maximum Protection

As discussed in our series on protecting your wealth and risk management, it is not enough to only protect your current possessions and investments. You must protect your full economic value- including future earnings- to achieve maximum protection. You can find a more in depth guide to achieving this in our previous posts, but building this safety around your income, investments, property, and life will help to protect yourself and your loved ones in case of a terrible tragedy. It may seem daunting at first, but the diligence needed to protect yourself and future is as important as the rest of these rules.

Annual Savings

What percentage of your income are you saving? We recommend that you save and invest 15% of your income annually. This may seem like a large number, but it is essential to achieving your full economic potential. If something is standing in your way of completing this goal, you must figure out how to break down that barrier – without this amount of liquidity and cash reserves, you put your family and future at a greater risk of financial catastrophe or failure. If you’ve struggled with debts, you can recapture those losses with the right financial model after you’ve eliminated that dead weight from your financial life.

Short Term Liquidity

You should always have 3-6 months of cash reserves on hand – this means enough cash to cover ALL of your expenses for that span of time, in case of a job loss or emergency. It is also smart to have 6-12 months of near cash in reserves held in an investment such as short-term bonds that are easily accessible. This cushion provides many benefits, including increasing your insurance deductibles to lower your premiums, freeing up more cash for investing and savings. These reserves give you peace of mind and the ability to navigate short term troubles without the added stress and worry of taking on debts.

A Balanced View of 401(K)s

Your 401(K) is a powerful tool for retirement. But it’s not an investment that you have easy access to. Taking loans against your 401(K) before retirement can cause major harm to your liquidity by robbing Peter to pay Paul. Early withdrawal is not any better, as you suffer an additional 10% penalty taxed as income, typically requiring you to pay taxes owed to the government. Even if you are just investing, your 401(K) can have limited options for investment selection, you can lose your employer match, and you typically pay for more expensive funds than in other similar accounts.

None of this is to say 401(k)s are bad. If your company offers one along with a company match, you should at least participate until you achieve the match, but only if you have achieved your short-term liquidity. This can be a complex balance to achieve and is an issue you should discuss in-depth with your trusted personal financial advisor.

Short Term Debt

Your short term debt should be zero. Carrying debts can wipe out your future profits as interest accrues and gains momentum. The two most common forms of short term debt that people carry are auto loans and credit card debt. You shouldn’t consider your car as an investment because it depreciates rapidly. A brand new car loses 50% of its value after the first three years on average. If you know how to shop smart, a used car that is 25% cheaper can be driven for years and preserve more of its value as an asset. Always use your debt intelligently!

Credit card debt can be one of the most crippling things for your financial life. An average interest rate of 15% means you pay $0.15 for every dollar you don’t pay off each year. As that accelerates, it can quickly grow out of control and destroy your financial life. If you can’t pay cash for something, you probably cannot afford it. Credit cards should be avoided, but held for cases of extreme emergencies or very special circumstances.

You may need to slow down other aspects of your financial life and even explore debt restructuring to achieve your target liquidity – this safety net is the most important part of your financial life. It’s crucial to follow these rules of balance in this order to move in a direction of health, stress reductions, happiness, and the best opportunity for financial growth.

Ready to get a complete picture of your financial health? Complete this questionnaire to get started with one of our advisors.

The Four Challenges to Building Wealth: Velocity of Money

As we continue our series exploring challenges to building wealth, we need to introduce the concept of velocity of money. In personal finance, the velocity of money refers to using your funds to build wealth more quickly by getting your money to do more than one thing at a time.

This is a well-kept secret of the financial industry and one that can transform your relationship to your personal finance.

How Can I Use My Money Now?

Accepting the status quo is not going to help grow your money and efficiently organize your personal finances. You’ve got to ask yourself “how can I use my money now to make things better down the line?”

Much of our culture and advertising is devoted to making you chase the “next great thing,” the next bit of instant-gratification, and that next hit of dopamine. While pervasive, it’s not a sustainable model for your life.

Choosing to embrace the following behaviors now while delaying those small bits of gratification will make your future life much more enjoyable:

  • Pay down debts
  • Build an emergency fund
  • Invest in your future
  • Invest in yourself
  • Save for retirement

Those choices may not offer the immediate reward promised by so much of our flawed, impulsive human nature and the marketing campaigns designed to take advantage of it. But in the long run, those small changes now will have a big impact on your life.

The Magic of Compounding

The reason why your choices today have a magnified impact on the future is because of two things: Lost Opportunity Cost and Compounding.

A dollar invested today has the opportunity to compound over and over through the years, building its overall value. You shouldn’t underestimate the awesome power of compound interest; If you’ve ever struggled with high interest credit card debt, you know how the momentum of compounding can build.

Turning this principle into a positive is why we stress the idea of “time in the market” rather than “timing the market.” Building your wealth is a process, and compounding can work for you if you consistently make intelligent choices over time.

When to Refinance Loans

If you’ve taken out loans, you’ve likely received countless direct mail advertisements for refinancing programs. While these seem like a great way to lower your payments, you must be cautious when evaluating them. Many come with early repayment penalties and fine print rules that heavily favor the program and lender rather than you.

If you have a loan you’re looking to refinance- such as your mortgage- look first for ways to remove your private mortgage insurance (PMI) after you’ve built 20% equity or more in the home. You can also look into ways to change your repayment term so that you can pay loans off sooner and save yourself thousands of dollars in interest. Any time a loan term can be updated in your favor it’s worth exploring new options. Just be sure to evaluate the entirety of your new solution and not just the face value of the monthly payment.

Make Your Money Work Harder

The real way to build wealth and increase the velocity of your money?

You have to be as demanding of your money as you are of yourself.

Are your investment and savings strategies underperforming? Update them. Is accelerating interest of outstanding debts hurting your overall quality of life? Rebalance your strategy to pay off debts sooner or explore refinancing options to ease some of the burden. Personal finance is complex, but solving issues can be as simple as acknowledging a problem exists and then finding a workable solution to that problem. We’ll discuss visibility and organization in our final post in this series, but know this: accepting lackluster performance will lead to a stressful and lackluster financial life.

Ready to learn how we can help you increase your money’s velocity to build wealth quicker and more effectively? Complete this questionnaire to see which Jarred Bunch Consulting service is right for you.

Four Challenges to Building Wealth: Rules of Financial Institutions

In continuing our exploration of the four challenges to building wealth, we’re looking into the rules of financial institutions today. We’ve written at length before about how financial institutions operate to get and keep more of your money. Take the time to educate yourself on these behaviors and how they get hold of your money and keep your finances operating in their ecosystem. These are definite hurdles for your wealth, but these principles can be adapted so you can grow your own personal finance.

Treat Your Finance Like a Bank

One way you can apply the rules of financial institutions to your own wealth growth is to remove some of the “personal” from your thinking about personal finance. Think of your funds as though you are a bank:

You want your money

  • Banks want you in their ecosystem. They want you to keep your funds with them, as much as possible. Work to hold onto your money with the same dogged determination. Eliminate high-interest debts and reduce what bills you can.

You want your money systematically

  • Sure, automatic deposits are convenient and secure, but that systematic deposit is more fuel for the bank to use while they hold your funds. Use these systems to your advantage, but keep track of your automatic payments and deposits. Cancel those you don’t use and keep your money systematically storing away for the future.

You want to hold your cash for a long time

  • Your balance year-over-year should be a gradual march upwards. Holding onto your funds and committing to the security of that growth will provide your life the security and abundance you deserve.

You want to give as little away as possible.

  • You never know when you’re going to need your emergency fund. You never know when the opportunity to invest in your dreams will arrive. Keep your funds around for when lighting strikes- good or bad.

Know All of the Details

Do you know your accounts’ rate of return? What about the annual percentage rate? Do you know if your mortgage or other loans have a prepayment penalty? Banks and other financial institutions don’t enter into a financial agreement or partnership without knowing every detail, and neither should you.

The details you don’t know can be what leads to financial disaster. Take the time to read, know, and clarify the details that the banks love to hide in the small print – it can be eye-opening.

Make Your Money Do Multiple Things at a Time

Sticking all of your savings in one account doesn’t make sense. In today’s uncertain world, you need to use a diversified strategy to make your money work harder for you. Other methods of saving your money include:

  • An Emergency Fund: This should be kept separate from your main checking and savings account. Keep the funds hard to access to prevent impulsive use and take advantage of automatic transfers to keep it juiced up. Most experts recommend that you have 3-6 minimum of living expenses in your emergency fund.
  • Investment Accounts: Exchange traded funds and mutual funds are ways to invest your money in shares of companies’ stock. You’re buying a piece of their business, in the hopes that the performance improves and more value is generated for your account over time.  
  • Retirement Accounts: 401Ks, the now-rare pension, and IRAs are types of deferred-income retirement accounts. Different types have different tax-incentives, and each offer crucial ways to build your nest egg for eventual retirement.

If you can find ways to accomplish more than one thing with a dollar, you’re hitting the big leagues alongside those institutions that are too big to fail. Spreading your investments out amongst these different accounts helps shield you from market volatility that can eat your returns, as well as providing vehicles to achieve different goals with your money.

Don’t Accept the Status Quo

The real secret to making your personal finance work as hard for you as the banks’ treasury does? Arm yourself with ambition and an abundance mindset. Know that there is always another option to explore that can benefit you in different ways. Don’t accept the current situation or enter into lopsided agreements that offer no benefit to you. If you are not growing or improving in your current financial situation, or career, or hobby, or workout routine why stay there? The world is full of alternatives worth exploring until you find something that works best for you.  

Ready to conquer the traditionally lopsided relationships between individuals and institutions? Learn more about personal finance with us at JB Wealthfit.

The Four Challenges to Building Wealth

If you’ve set up automated deposits, selected an investment mix, and have a general awareness of your overall financial status, you’re doing well. This is especially true when you consider the huge number of Americans who have under $500 in savings and don’t track their spending.

Unfortunately, there’s a lot more to growing your wealth than setting up these healthy behaviors. In fact, there are four distinct challenges to building your wealth and overall financial wellness. We’ll take deep dives into each of these factors in the coming weeks to help arm you against these threats to your wealth building strategies. Today we’re offering up a preview of the posts to follow as part of our four part educational series. We’re hoping you tune in and learn along with us each week.

The very real threats staring down your personal wealth include:

Lost Opportunity Cost

You might think that if you spend one dollar, you’ve effectively lost one dollar, right? Sadly, it’s not that simple. If a situation arises that requires you spend money you would normally save or invest, you’ve lost more than just that amount of money- you’ve given up what that dollar could do for you in the future.

Whether this spending comes from unexpected bills (like medical expenses or emergency car repairs) or from impulse spending (we all remember Cyber Monday), the outcome is the same: you’ve traded the future growth potential of that dollar for the use of it right now. In our deep dive, we’ll look further into how to measure lost opportunity cost, the role of volatility in assessing it, and how to use these measurements to make decisions about your finances and life.

Rules of Financial Institutions

When is the last time you read your bank or credit union’s service agreement? Do you know the steps to take if you want to close your current checking account and open one elsewhere? There’s a reason why the fine print is small and difficult to discern; hidden within service agreements and fine print are many policies that make your money work harder for the institution than it does for you. It can be difficult to disconnect from your current bank’s ecosystem. They want to ensure that while your savings account earns 0.01% interest annually they can loan your funds to a credit card user and charge them 27% APR.

In our examination of financial institutions’ rules, we’ll reveal how they make it difficult to use your money, how to find a more beneficial partner, and ways you can use banks’ approach to finance to guide your own wealth management strategies.

The Velocity of Money

Velocity is the speed of something in a given direction. While “the velocity of money” is typically used by economists studying the GNPs of different countries, it also applies to your personal finance. In this setting, it means how you get your money to do more than one thing for yourself at the same time. Whether this means opening a higher-yield savings account to hold your quarterly payments for freelancer income taxes or refinancing your mortgage to remove a PMI and expedite your amortization rate, figuring out a way to make your finances work harder and faster is key to your financial health.

In our dedicated blog post we’ll further explore the velocity of money, its potential impact on your financial wellness, and ways you can adopt financial institutions’ strategies to make your money work harder.

Financial Organization and Coordination

You can’t build what you don’t know. It’s not enough to be aware of your finances – you have to aggressively coordinate and organize your money so that it moves and grows in a productive manner. This topic is one of the largest stumbling blocks for the general public – our financial systems mean ignorance is bliss for many. But taking time to organize your money and enact a strong plan will empower you and remove a lot of the stress associated with personal finance.

We’ll look into ways to organize your funds, why you should treat your household’s finances like a business, and how to get over the initial fear and pain that comes from discovering where your money may have gone wrong.

Wrap Up

The short story? These are in no way simple challenges to tackle. But taking the steps to empower yourself through this learning will put you on the path to building your wealth and improving your overall financial wellness.

Ready to tackle these challenges together? Complete this questionnaire to help us better understand what value we can bring to your life. It’s time to start making your money work for you.