The following checklist offers some practical applications of financial principles that will make you well-positioned to respond to unforeseen future events.
Cash Reserves
Safe, liquid cash doesn’t get feature articles in financial publications, and no one eagerly awaits quarterly performance reports on savings accounts or life insurance cash values. But for those who want to be ready for “happy accidents,” nothing has all-purpose financial utility like cash reserves.
In the happy accident paradigm, cash reserves serve two purposes: (1) They are a buffer against negative financial events, like a health issue or job loss; (2) Having cash reserves means other assets will not have to be liquidated, and long-term plans already in place can continue. Cash reserves also make it possible to “show up” for those unforeseen opportunities, such as bidding on distressed assets at auction, making a down payment on a property, or paying the tuition for a new license or professional designation.
In hindsight, some might say “Well, I would have been better off putting that money in the stock market instead of earning a paltry interest rate just to have the cash available.” True, but that’s a backward-looking perspective. A healthy cash reserve prepares you to enjoy happy accidents. And the return from just one great opportunity can make all those hindsight discussions irrelevant.
Personalized Benefits Plan
Have you ever heard someone say, “I’d like to make a change, but I can’t afford to give up the benefits?” This comment might apply to group benefits available through an employer, particularly health insurance. Group benefits are typically affordable, easy to acquire, and easy to pay for. Unfortunately, most of these benefits are not portable. If you terminate employment, the benefits also terminate.
If you are looking to increase your income and advance your career, you don’t want your opportunities restricted because of the lack of a personally-owned, portable benefits package. At a minimum, this means individual life insurance and disability income replacement policies and, perhaps, professional liability insurance as well. Since individual policies often entail more rigorous underwriting, the prudent move is to obtain coverage while you are insurable instead of waiting until an opportunity—like self-employment—makes it a necessity.
Balanced Long-Term Wealth Accumulation
The impact of new tax rules on investor behavior will not be fully evident for a while, but being prepared for possible happy accidents requires thoughtful consideration of allocations to qualified retirement accounts. Qualified accounts have measurable up-front tax advantages, but also impose restrictions and tax penalties on early distributions. In contrast, non-qualified accounts have greater liquidity, often accompanied by ongoing “carry costs” of dividends and/or capital gains. How do you determine your appropriate allocations to these different accounts?
Your answer should reflect an appreciation for financial flexibility. If a business opportunity requires a sizable down payment, where will you get the funds? Preparing for happy accidents challenges the frequently-heard recommendation to “maximize retirement account contributions,” because an over-emphasis on retirement accounts may limit other options.
Manageable Debt
Borrowing is an exchange of the future for the present; in order to have something today, you are committing a portion of future income. Often, these transactions make sense. But even if you can afford the ongoing payments, too much debt can take away from future opportunities. Paying down debt may not always increase wealth accumulation, but it does buy back your ability to take advantage of the future.
For many individuals, their biggest debt issue is their mortgage. As the residential real estate market has tanked, many homeowners are underwater; they owe more than the current market values of their homes. This situation makes it difficult for homeowners to relocate. A job change could force some tough no-win decisions, like carrying the cost of two homes, becoming a landlord, petitioning for a short sale, or, in extreme circumstances, walking away from the property and absorbing the fallout of a ruined credit score.
There are no hard-and-fast numbers to attach to this checklist. Some ratios or percentages may serve as guidelines, but each individual’s situation is unique. However, empirical evidence suggests most Americans, even high earners, are under-funded, under-insured, and carry too much debt. These weaknesses may not be financially crippling, but they certainly preclude many from exploring career and financial opportunities beyond their current employment and retirement plans.
Elozor Preil is Managing Director at Wealth Advisory Group and Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). He can be reached at [email protected]. See www.wagroupllc.com/epreil for full disclosures and disclaimers. Guardian, its subsidiaries, agents or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.
By Elozor M. Preil
