How many times in your life have you started a sentence with the words I feel? When we use these two words in a financial discussion, they can sometimes thrust you into a world of make believe. For example, I had a conversation with a young lady a few weeks ago who graduated from college in 2015. While asking a few questions so I could better understand her current financial situation, I noticed she kept saying, "I feel" while giving her response.
One of her goals is to get an apartment of her own and move out of her parent's home. I recall her saying, "I feel like I need my own apartment at this stage in my life." When it comes to money, feelings are one thing and then facts can sometimes be quite different. After discussing her income and monthly bills, we quickly discovered she could not afford to move out of her parent's home. A quick math calculation provided the answer we needed. We then were able to come up with a plan of action to increase her income and minimize expenses (usually the only two ways to solve a financial problem).
Here are a few financial questions that can be answered with a fact (or estimate) and not a feeling:
If my household continues to save X% of its monthly pay for the next X number of years, how much money might we have by the time we plan to retire? https://www.nerdwallet.com/investing/retirement-calculator
If I plan to retire one day, how long will my retirement nest egg last? https://RetirementPlans.Vanguard.com
If my employer told me I was getting laid off in three months, how many months could I live before having to borrow? The answer can be found by adding up your household expenses that are mandatory (e.g., mortgage, homeowner's insurance, utilities, grocery, car payment, car insurance, health insurance). Next, divide the balance in your emergency fund by the total of your monthly expenses. For example, if your mandatory monthly expenses totaled $4,000 and you had $12,000 in your emergency fund, you could live for 3 months ($12,000/$4,000) without having to borrow.
Assuming you left this world today, have you obtained the appropriate life insurance to ease the financial burden for the person(s) who would have to care for your dependent(s)? Have you documented what should happen with your estate?
Assuming you are an investor, do you know how you are being charged (e.g., fee-only, commission only, fees and commissions)? If you are being charged a certain percentage of AUM (assets under management - total market value of the investments that a person or entity manages on behalf of clients), how is that impacting your future wealth building capability? For example, if you have $1,000,000 in your portfolio and the AUM fee is 1% annually, that's a fee of $10,000*.
Remember, each of the above questions can and should be answered. I feel like you can do it but I know you either will or will not.
*Note: This example assumes no change in account value and a one-time charge at the end of the year. Though the published rate is annualized, fees may be taken out more frequently on a pro-rated basis - generally daily if charged by a mutual fund company, or quarterly if by an investment adviser. This means the actual amount you pay each year can vary, since your account balance varies day by day.
