I’ve been a financial professional for 14 years. In that time I have come to understand (at least) two essential financial factors to a long-term happy life. Get these two things right and you’ll avoid the most major problems that will prevent you from being happy and productive. Ignore either one and you’re asking for trouble.

Two Financial Factors

Quite simply these two points are:

  1. Save and invest at least 15% of every dollar you earn for the long-distance future (retirement, old-age).
  2. Protect whatever you do have from catastrophic losses.

bigstock-financial-factors-levers-114963524-MNow, I’m not a big fan of generalizations and one-size-fits-all rules but I’m breaking from that resistance with this post.

I am paid to help others with their personal finance questions, concerns, issues and decisions. Just as most folks don’t see the dentist until the pain is unbearable (and the only option is a root canal or worse), prospective financial planning clients only set up their first appointment after they’re already in a world of financial hurt.

In every case over the past 14 years, they were in pain because one or both of the two essential financial factors listed above had been ignored.

Save and Invest 15%

Of all the helpful financial habits, saving is the one to develop early (before junior high school is best) and maintain through life.

On average long-term retirement savings work best at least 15% of gross (before tax) income. Of course start earlier and you can lower that percentage.

Saving without investing doesn’t solve the problem. Your savings have to grow faster than inflation. Historically, savings accounts and CD’s have not accomplished this. Without proper investing, that 15% becomes something closer to 25% or more. Contributions to a 401k count towards your savings percentage but generally it is more efficient if the total 15% is spread among tax-deferred accounts (IRA, 401k), tax-advantaged accounts (Roth IRA) and regular investment accounts (taxable at long-term capital gains rates).

Protect What You Already Have

The protection piece is often overlooked because the risks are rarely realized. They aren’t in the news every day so it’s easy to ignore them. They still can have a devastating impact.

Protection can be insurance (car, home, life, disability and long-term-care) but you also need to think about how to protect your investment portfolio. 20-60% stock market losses happen every 7-8 years on average. Those portfolio losses can be avoided. Your income and your health (another set of habits to shape) also can be protected.

Yes, I’m biased. This is a big part of how I earn a living. But really, the value of working with a fiduciary financial professional is having someone who is trained to accurately analyze and respond to these rare-but-large-scale risks. One or more major risks WILL likely bite you in the tail at some point in your life, whether you are protected from it or not.

More Detail

I’ll dig into these two components in greater detail in the future, but these two questions are a good start. (1) Are you saving enough (15% or more)? (2) Is what you already have adequately protected from an unnecessary catastrophic loss? A followup question here would be – “How do you KNOW?”

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