No matter how much money you have, you probably have some degree of financial anxiety. That’s OK. In fact, it’s healthy to a degree. But if you are worried about running out of money you can cool down right now. Here are 5 rules which, if followed, can help you scratch finances off your “worried about” list.
1. Balance Income, Spending and Assets
Plenty of people earn millions and millions and yet they go broke. Others take on an extreme frugal lifestyle but find no escape from financial worry. And I’ve met lots of people who were worried sick over finances despite the fact they had a 7-figure net worth.
These people suffer because they lack balance. You can sideline that problem pronto by understanding the relationship between assets, income and spending and putting that understanding to work in your favor. The concept is really simple:
A. Your income is a function of what you earn or receive from pensions and/or Social Security.
B. Your investments can generate passive income.
C. The sum of (A) and (B) must be greater than what you spend.
D. If your spending is greater and your earned income, pensions and passive income, you have to earn more, spend less or a combination of the two.
Neal’s Notes: While we’re on the topic of balance – make sure you balance your life with your finances too. It’s actually your first, most important step in finding success.
2. Monitor Your Money
Without the balance I described above, you run the real risk of running out of money. In order to insure the harmony is in place, you have to keep your eye on the ball.
- What are you really spending, on average each month?
- Are you saving enough?
- Are you investing correctly?
- What are your investments earning?
- Are your investments structured for passive income?
- Are you withdrawing enough/too much from your investment accounts?
Of course you need to answer these questions when you set up your initial financial plan. But you should also revisit and re-examine these topics every year or two (at the most). That way, if you are out of balance, you can make corrections before it becomes a huge problem.
I met a couple last year who could no longer afford to live in their house. They reached their mid-70s, were retired and simply didn’t have the scratch to make ends meet anymore.
The good news was they plenty of equity in their home. They could easily downsize their lifestyle a little and have a very comfortable retirement. This was easy to say but hard to do. All their friends and social life was centered around their home and they found it very difficult to implement this solution. I understand this of course but it was still a shame. It left them in a very stressful situation that was completely avoidable.
As I said above, if the balance is off, you need to create more income, spend less or do a little of each. If you don’t find equilibrium, the universe will do it for you sooner or later. Consider the example above. The couple might be able to stay in their home a few more years but after that they won’t have any choice. They’ll be forced to sell or they will lose their home. If they wait too long, they’ll have far fewer choices than they have today. That’s why it’s important to make sure you are always in balance.
Would like some help putting your financial plan together? Maybe I can help. Send me your questions or request a get-to-know-you free consultation.
I’m a huge fan of being accountable. I’ve spoken about it many times. It’s the secret sauce that turns dreams into reality. Get someone you like, trust and respect and ask them to be your accountability partner. Show them your plan and report back on how closely you are sticking to it.
Yes you’ll have to share some pretty intimate details of your financial life with that person but that’s a small price to pay. When you do this, the odds of actually achieving your financial goals rise exponentially.
5. Don’t Stress
Even if you take all these steps you still may fall short. That’s because we are dealing with an uncertain future. Everything changes and you could end up with the short side of the stick despite your best efforts. No worries. It’s just time to go back and find a new balance and keep the lines of communication open with your spouse.
Once you do everything you can, you’ve done your best if you ask me. And if you really do your best on the 4 steps above, you have done all you can. You should be proud of yourself no matter what the results are.
If you want to make sure you never run out of money you’ll have to be brutally honest with yourself and take on a new approach to your finances. It takes a little work but not much. And if you are willing to take these steps the payoff is huge. You shouldn’t have to worry about money for the rest of your life. Not a bad bargain.
Are you implementing any or all of these steps? Which ones?
Read you each and every Sunday, Neal. Wishing you and yours a “Happy New Year”!! in these trying times. Keep up your post.
Neal Frankle, CFP ® says
Thank you Charles! You too!
Daniel Zajac says
Great article. Simple and straightforward. Yet it addresses many of the key issues people face when looking at their finances.
It’s interesting to note these are the are often the issues regardless of age, income, and net worth.
Just checking .