How to Be Safe with Your Money

by | Aug 2, 2022

With so much uncertainty in the world, what can you do to be safe with your money? 

While it’s impossible to completely insulate ourselves from risk and danger, there are certainly ways to protect ourselves and our finances. 

My goal here is to give you some practical and actionable ways to help alleviate stress and anxiety, while positioning yourself for long-term financial success. 

As a financial advisor for over 20 years, I’ve helped a lot of people better understand and be safe with their money. I’m honored to be named to Investopedia’s list of the top 100 financial advisors many years running.  

Here’s what we’ll cover:

  • Your emergency fund
  • Your risk tolerance
  • Your asset allocation
  • Diversification
  • Two practical examples

Let’s get started.

Your emergency fund

Peace of mind means feeling safe and protected. Financial peace of mind is found by having the proper insurances, as well as a fully funded emergency fund. While your emergency fund may not be the most exciting part of your financial life, it’s certainly one of the most important. 

Pre-Pandemic, I would encourage people to have emergency funds of three to six months worth of expenses. Post-Pandemic, I recommend a minimum of six months. Once you’ve got that saved up, it’s almost instant peace of mind. 

Now, the last thing I’m ever going to tell anyone is that it’s easy to save that much money. I know how hard it is. 

To figure out how much you should save, you’ll need to be managing your cash flow and keeping a budget. What we’re trying to solve for are your consistent monthly expenses. Some will be fixed (mortgage/rent, vehicle expenses, insurance premiums, child care, etc), and some will be variable. 

If you’ve been budgeting, you’ll be able to look back and get a sense of what your average expenses are. If you haven’t been in that habit, it may take you a month or so to figure out your numbers. From there, put together your plan for how long it will take to get to six months (or more). 

You should keep your emergency fund in a checking, savings, or money market account that is separate from your every day checking account. I know that doing this has an opportunity cost (because the money is not being invested), but the last thing I want is for you to experience an emergency, only to find your balance is down 25% because of the stock market. 

Getting a fully funded emergency will give you security and peace of mind. It will help you be, and feel, safe. 

Your risk tolerance

Anytime we invest, we take on risk. When we take on too much, we can have a hard time getting a good night’s sleep. If we don’t take on enough, it becomes difficult to achieve our financial goals and objectives. So what’s the “right” amount?

It’s important to figure out what your risk tolerance is. There are five types of investors: 

  • Conservate
  • Moderate conservative
  • Moderate
  • Moderate aggressive
  • Aggressive

To determine what type of investor you are, you can take a Risk tolerance quiz. 

You can certainly adjust your risk tolerance anytime it’s appropriate. You may also discover it may change as you learn more about investing and the markets.  

Your risk tolerance informs your asset allocation. 

Your asset allocation

Asset allocation is the term used to describe your mixture of investments. It’s commonly broken out into percentages of asset classes (types of investments). Don’t worry, I’ll break everything down so it makes sense. 

There are four primary asset classes:

  • Cash 
  • Fixed income (bonds)
  • Equities (stocks)
  • Alternatives (commodities, real estate, and cryptocurrency)

Within each asset class, there are also many categories. For a moderate investor, the percentage breakdown could look like this:

  • 24% Large US equity (Big companies located in the US)
  • 22% Short-term fixed income (Cash)
  • 20% International equity (Companies located outside the US)
  • 18% Fixed income (Bonds)
  • 16% Small to mid US equity (Small to medium companies located in the US)

While there are many ways to successfully invest, the simplest and most efficient way to properly diversify is to utilize mutual funds and ETFs (exchange traded funds). 

Diversification

We’ve all heard the saying, “Don’t put all your eggs in one basket,” and that’s certainly true for investing. The investing equivalent of this is to buy shares of an individual stock. Let’s take Google for example. 

You and I both know Google to be an incredible company. It’s making a lot of money, and doing a lot of wonderful things to improve our lives. But I’m still not going to invest all my money in its stock. 

I have no idea what the future holds, and while I doubt Google will ever go out of business, I’m not going to bet my financial future on it. 

The opposite of investing all our money on one stock is buying a mutual fund or ETF. These financial vehicles allow us to spread our investment dollars across a wide range of companies. The S&P 500 index is a great way to illustrate this. 

There are many companies marketing S&P 500 funds. The S&P 500 index is the 500 largest US based companies on the stock market. When you buy a share of this index, you own a piece of all 500 companies. 

So, instead of owning one share of Google, you own a piece of 500 great companies. That’s a diversified approach. 

This is also a very low-cost investment. Some S&P funds cost less than 2 basis points, or .02%.

That’s almost free. 

Two practical examples

Now, I’d like to go back to the moderate asset allocation I mentioned earlier. I’m going to add actual mutual funds to provide you with a real-world example. 

If you had $10,000 to invest, you put $2,400 into the large US equity, $2,200 into short-term fixed income, $2,000 in international equity, $1,800 into fixed income, and $1,600 into small to mid US Equity. 

The second real-world approach is using something called a robo-advisor. A robo-advisor is a new, tech-enabled form of investing. These investing platforms have been around since 2008, and have brought high-quality, low-cost investing to the masses. 

For example, Betterment offers asset allocation models (pre-made asset allocations), and the total fees are around .34%. So, instead of you going and purchasing the investments yourself, you simply select the “model” (in our case moderate), and the robo-advisor does everything for you. 

Personally, I really like robo-advisors because they make the process easy. 

Conclusion

It’s really important to take the time to understand what kind of investor you are, and to select the right investments for your situation. The more educated you become, the better. 

I invite you to connect with one of our Certified Partners to get any question answered. 

If you’re ready to take control of your financial life, check out our DIY Financial Plan course. 

We’ve got three free courses as well: Our Goals Course, Values Course, and our Get Out of Debt course. 

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