DON’T LET FEAR MESS UP FINANCIAL PLANS
COMPLACENCY CAN CAUSE YOU TO IGNORE FUTURE NEEDS
Fear is a strange dance partner. When it’s not paralyzing your decision-making, it’s causing you to ignore equally scary scenarios. Fear is so powerful it can turn preparedness into complacency. As it pertains to your finances, fear and misdirected efforts to quell it can cause you to ignore the needs of your financial buckets.
I met a woman from Missouri recently who had a big chunk of money. Let’s call her Sally. Sally was in her mid-30s, was the sole wage earner in her household and had a very unusual income. Some months, she would make a large amount of money. Other months, she would make a really large amount of money.
Yet fear was always present. She was terrified her moneyearning ways were nearing a reckoning. By reckoning, I mean the really large months would turn into large months, all of which could easily support her family on an ongoing basis.
Instead of investing for her future, which would allow time to help her grow her money, Sally was hoarding money in her savings account.
“I sleep better at night knowing I can access it,” she explained.
But there was a really big problem, which wasn’t easily detectable given her fear. Sally was completely ignoring her future.
If you’re a Sally apologist, right now you’re defending her right to do whatever she wants with her money. I won’t argue that point. But what she is doing is equivalent to an extreme couponer who just purchased 94 cases of yogurt and is idly standing by, watching it expire. People can do whatever they want with their money, but that doesn’t make it right.
Sally’s fear of not having money is causing her to blow her chance at long-term financial stability. This is more common than you think. I’ve met dozens of people who have one to two years worth of expenses in their savings accounts. The strategy was originally driven by fear, then moti- vated by stability and practicality, and finally finished with a large dose of complacency. Financial complacency, which originally derives from fear, causes people to ignore objectively more important challenges, like creating long-term stability.
For instance, if you have one year’s worth of cash set aside and you’re depositing even more into this account on a monthly basis, all the while minimally funding your retirement accounts, you’re doing it wrong. You’ll feel like you’re making a smart choice, but you aren’t. You’re ignoring two very important buckets.
The money you decide to set aside has to flow into three distinct buckets. The first is your short-term bucket, also known as your emergency fund. It should consist of funds to cover three to six months worth of expenses. Typically, money placed in this bucket is not exposed to much risk, thus it receives very little investment return. But that’s OK. Its job is to protect, not grow.
The second is your midterm bucket. It primarily will be used for non-emergency, non-retirement purposes. Think down payment on a home, college expenses, funds to start a busi- ness, and anything else you can dream up. If enough money exists in this bucket, you can retire early, as most retirement funds aren’t readily accessible prior to age 591⁄ This bucket of money can be invested with a broker, on your own or even online with a robo-adviser. The level of risk you take should be in line with both your risk tolerance and your time horizon. Personally, when I think about wealth, I think about the middle bucket.
Third is the retirement bucket. More specifically, retirement funds available after age 591⁄ 2. That’s the special age attached to retirement accounts in the U.S. Under normal circumstances, the entirety of a retirement account can’t be accessed until the account holder is 591⁄ 2. The tempta- tion is to ignore the third bucket (since there are restrictions). Depending on your age, access may be years away. However, this bucket will support you when your work income ends. It needs to be substantial enough to last decades. Frankly, that’s what you should fear.
One of the biggest challenges is to put the right amount of money in the right bucket. The first and third buckets are the most important. Ignoring either will absolutely result in financial disaster. But ignorance isn’t the sole perpetrator. Fear can ruin the dance just the same.
People can do whatever they want with their money, but that doesn’t make it right.