Making Personal Finance Decisions When Things Are Good
My house starts to go silent for a few hours this week. For the first time, all four of my kids will be in school. The oldest in eighth grade, the youngest in pre-school. It has been ‘all hands on deck’ for thirteen years, always having a baby or toddler in the house. As you might imagine, the dynamic parenting required to raise this crew has left my wife and I with frayed nerves more than we care to admit. Things break, plans change, and there are plenty of setbacks in this season of life. We know two things for sure through all of it: These times are far from perfect. These are the Good Old Days.
Sometime down the road, when the house is truly empty of kids, we will long for the vitality of the stage of life we are in right now. I will wish I could walk through the yard and trip into the foxhole that my son dug to guard the neighborhood. We will lament that no one is making cookies with a cup of baking soda instead of a teaspoon. Years down the line, I will probably give anything for one more chance to take a knee, look my three-year-old in the eye, and hear her explain how she wants to be a dog when she grows up.
In between all these memories lies an emotionally charged haze of tired days, life lessons, and teachable moments. Despite all of that, we know these days may be our finest. We may be at our best as parents right now, but it doesn’t feel like it. Our kids may be developing into the best versions of themselves, but it doesn’t feel like it. The decisions we are making about our financial future might set us up for prosperity and security later, but it doesn’t always feel like it. That’s always the way in the moment. We never recognize how good we have it until we have the clarity of hindsight.
This is not just true of parenting. When we look at the world around us it is easy to focus on the negative and chaotic at the expense of all that is good. The list of perils is long, but it always is. To counter that negative sentiment, let’s make the case for right now being The Good Old Days for investors:
- The S&P 500 is only about 3% off its all-time high
- We are in the longest economic expansion in U.S. history
- Inflation is at record lows
- Interest rates, while low, are better in the U.S. than almost anywhere else
- Taxes are relatively low
- Unemployment is at historic lows
This is not to say that it will always be this way, only that if there were a time to act from a position of strength, now might be better than later. If a recession were to begin tomorrow, many of these things would change for the worse and we would look back on today as an opportunity to act.
If we assume today may be better than some point in the future, what would we do differently? Much like an elder parent would look back and say, “I wish I had done that with my children in The Good Old Days,” what personal finance decisions could be made today to make the most of a good situation? Here are some ideas:
- Focus on how you are invested, not on your past returns. Understanding your investments is different from knowing whether they have gone up or down. If you are up 15% so far this year, you own stock-like risk and that may not be appropriate considering your stage in life. Ask yourself if you can handle the downside that goes along with that? If the peak of the market is imminent, you are 12 years older than you were when the last recession and significant market drop began. If you are concerned about your ability to weather a downturn at this stage in life, now is the time to be proactive.
- Communicate about your plan. Talk about personal finance decisions with your spouse, your partner, your children, anyone who you care about. Consult your financial planner, accountant, and estate attorney. Make sure the right people have visibility on the state of your family finances. Your professional team can help bring clarity to make informed, proactive decisions and help avoid being reactive when the next crisis comes. For your family and professionals, though, now is the time for understanding. I just can’t stress this enough: The time for everyone to figure out your financial situation is not when the market drops, or the job is lost, or the husband passes away. Opening the lines of communication about finances makes it easier to make decisions later when the stakes and stresses are higher. At the very least, the people who you care about should know who to call and what to do in case of emergency.
- Control what you can control. Specifically: Spending and Liquidity. Do you know how much it costs to maintain your lifestyle? Do you know how you would sustain or change that lifestyle if interest rates drift lower and we get a market downturn? Understanding your spending is the first step to having flexibility for an uncertain future. The second step is maintaining liquidity. You can’t spend what you can’t reach. We can be convinced to lock into certain investments, or gifting strategies, or trusts when we feel flush during the boom years. The trade-off for these is often that you limit access to your principal. Be careful about maintaining the right amount of liquidity and flexibility in your plan. You might need to change the plan based on circumstances that you never saw coming.
You may be feeling that things aren’t so great right now and it may give you anxiety and energy of the wrong variety. That’s normal and that’s okay. The key is to step back with cool detachment and know that you are empowered to make personal finance decisions from a position of strength. Apply that energy proactively so that you can say that in the Good Old Days, you made the most of it.
Being proactive starts with understanding where you are. If you would like to start a conversation about your unique situation, contact us.