The nuanced decisions of financial planning and security become easier when you've put on your financial ARMOR. Image: fukomuffin/Shutterstock.com
By: Tyler Weerden, CFE, Layered FinancialAwareness, Reserves, Mindset, Options and Risk Management are five steps you can take toward achieving a solid financial foundation for the long term.
In both law enforcement and personal finance, getting the basics right matters. Investors tend to get lost in the weeds, obsessing over the “icing on the cake” factors. Stressing over Roth versus traditional or ETFs versus mutual funds are things to ponder after building the foundation. To build wealth, you need to put on your financial A.R.M.O.R. first.
Awareness
Imagine you’re on a road trip and wake-up after a nap in the backseat. The driver asks you, “Should we take the next left?” There’s no way to answer that question without knowing where you are and where you want to go. You can’t make an informed decision on a stock/bond mix or choose emerging market funds over developed market funds without first knowing where you are and where you want to end up. The first step is being aware of your goals, values and time. Should you invest or pay down debt? Do you want to donate to charity? Is it time to buy a home? These are all questions that center around awareness.
Getting clear on what you value and what your goals are will build the foundation for more technical questions.
You then should match your spending, saving, and investing to those values and goals. We all should be hyper aware of time; it really is our biggest asset. The sooner you start working towards a financial goal, the easier it’ll be to accomplish.
Develop a timeline for each goal and a time horizon for each investment. Giving each dollar a job with a “spend date” will help you match those dollars with the proper investment.
Next, know your income and expenses. A note on expenses. We tend to unintentionally underestimate our expenses. Take a few months of your bank and credit card statements and actually list out every single expense on a piece of paper or spreadsheet. Don’t forget to account for non-monthly recurring expenses like 6-month insurance premiums, annual memberships, etc.
After you determine your monthly cash flow (income vs. expenses), figure out your net worth.
Here’s a net worth calculator from the FDIC to get started. List what you own (assets) and subtract what you owe (liabilities). Finally, know your interest rates. Are you carrying high interest debt? Should you refinance a loan? Could you be earning more interest with a different account? Self-awareness on both the math side and the values/goals side should be your financial operations base.
Reserves
This is your life preserver. Hopefully you never need it, but that’s no reason not to have it.
How much emergency fund do you need? It depends.
Consider these factors: (1) Single income or dual income household? (2) How quickly can you find another job that will provide the same income? (3) Are your expenses higher than your income? (4) Do you have other assets that can provide income? 3-6 months is the typical industry recommendation, but it’s a personal decision.
Where should you keep it? The emergency fund doesn’t exist to earn stock-like returns, it’s there to provide security. My personal rule for an emergency fund is this: if the money is absolutely going to be spent in the next 5-7 years, it shouldn’t be invested in stocks. I’m not saying stocks are a risky investment, but they can be volatile (think Covid Crash, 2008, dot com bubble).
Options for your emergency fund include a High Yield Savings Account (HYSA), a money market mutual fund, and possibly short term bonds.
ere’s a list of HYSAs from NerdWallet. My emergency fund currently sits in the Vanguard Federal Money Market Fund. A quick note on bonds. Bonds sold before maturity and certain bond funds may decline in value if interest rates go up. Bonds and bond funds may not be the best option for immediate emergency funds.
I personally have opted to buy individual U.S. Treasury Bills (“T-Bills) with money I know that I’ll need in the next 12-24 months. Most of these T-Bills that I’m using mature in 6-months or less. As they mature, I reinvest the money in a new T-Bill. Interest payments from U.S. Treasury Bills are taxed federally as ordinary income, but are free from state/local tax.
Mindset
Optimistic – to invest in the stock market is to be an optimist. You’re betting that the companies you invest in will continue to innovate, grow, and produce profits, resulting in price appreciation and/or dividend payments.
If you invest in government or corporate bonds, you’re expecting that those entities won’t go bankrupt. The negative, “doom and gloom” mindset is one for poor investors. Watching financial media all day and seeing the Armageddon-themed economic scenarios can lead to emotional buying and selling.
Skeptical & Realistic – you need to be optimistic while also being skeptical and realistic. If anyone tells you about an investment with absolutely “zero risk” plus a high “guaranteed” return, you need to run. Is it too good to be true? Never forget that risk and return are always related. Do your own research or talk to a professional about what returns you should expect from certain assets.
Lastly, constantly learn. Whenever I hear a great financial mind being interviewed, I’m amazed at how humble they are and how they always talk about what books they’re reading. Be the same way. With laws and regulations constantly changing, reading a finance article or two every month will help build that armor.
Options
Create options while also being willing and able to take them. When federal agents are protecting a government official, they plan multiple driving routes and have various emergency egress options at each venue. Having options will help mitigate risk. You create options in your financial life by building layers of protection and creating various routes to success.
Some examples of building layers of protection include having emergency reserves, purchasing adequate insurance, not being over leveraged, and being cautious with too good to be true financial products. You create different routes for success by diversifying your investments, in terms of both asset allocation and asset location.
Creating a financial life with options provides a stress-free way to handle emergencies while also allowing you to take advantage of opportunities when they arise. The other aspects of A.R.M.O.R. also give you options. Awareness, reserves, proper mindset, and proper risk management create a life where you’re agile and not trapped during life’s twists and turns.
Risk Management
Everything we do is centered around risk. If you’re a fire fighter, paramedic, police officer, soldier, federal agent…this should be second nature. What’s the probability of this or that happening, and if it does, what’s the impact? Diversifying (not having all your eggs in one basket) is a good way to mitigate risk when investing. When one thing zigs, we hope the other things zag.
Adequate insurance is a must. Each year you should do a personal insurance audit. Consider your health, auto, home, renters, personal liability, umbrella, disability, long-term care, and life insurance needs.
Employer open season is the perfect time to do an assessment of what you have, and what you need. Remember, insurance is not an investment, it’s a transfer of risk. Do your due diligence on any insurance product that boasts stock-like returns.
Estate planning – not a fun topic, but I would argue this should be #1 on your to-do list.
Designate your beneficiaries today! Having the proper beneficiary designations costs you nothing, and is extremely powerful. Did you know a designated beneficiary form will override a written will? Still have your ex-spouse listed as the beneficiary on that old 401(k)? Haven’t added your youngest child to the beneficiary split amongst the other children?
Get these done ASAP. These are the foundational documents that you should consider creating. Obviously, consult with an attorney in your state. (1) Last Will & Testament. Where will your assets (that aren’t assigned by way of title, ownership, or beneficiary form) go if you pass? Who will take care of your kids? What happens to your dog? (2) Advanced Directive/Living Will. What medical care do you want? To what extent do you want to be kept alive if terminally ill. (3) Durable Power of Attorney. This gives someone the power to act on your behalf with various legal and financial matters. A “durable” POA will continue to be effective even if you’re incapacitated. There are other steps that you can take to further control your assets such as creating a trust. It’s worth paying an attorney for a few hours of their time to get the right documents drafted. Don’t be cheap on this one.
Summary
If I met someone today who was brand new to all things personal finance, these 5-steps would be my top priority. All of the more nuanced decisions become a lot easier when you’ve put on your financial armor. Most of us didn’t have a personal finance class in school when we were growing up. This fact combined with the glitz and glam of social media money gurus, overnight millionaire day traders, and Tik Tok advisors make it hard to hear through the noise. If you’re reading this and thinking of someone you know, maybe a colleague who’s just starting their financial journey, perhaps share this article and help them put on their armor.
Tyler Weerden, CFE is a financial planner and the owner of Layered Financial, a Registered Investment Advisory firm. In addition to being a financial planner, Tyler is a full-time federal agent with 14 years of law enforcement experience. He holds a Bachelor of Science degree, a Master of Science degree, the Series 65 license, and is a Certified Fraud Examiner (CFE).
Prior to becoming a federal agent, Tyler served as a state trooper, local police officer, and was a member of the U.S. Army National Guard. He has served in both domestic and overseas Foreign Service assignments. Tyler has experience with local, state, and federal pension systems, 457(b) Deferred Compensation, the federal Thrift Savings Plan (TSP), Individual Retirement Arrangements (IRAs), Health Savings Accounts (HSAs), and various investment options to include rental real estate.
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