All posts by Financial Independence Hub

Real Life Investment Strategies #3: What is the Difference Between a Lifestyle Reserve and an Emergency Fund / Financial Cushion?

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Image Lowrie Financial/Canva Custom Creation

By Steve Lowrie, CFA

Special to Financial Independence Hub

Having an emergency fund is common advice, whether you are reading this in the financial media or hearing it from a financial advisor. Many people who are later in life and feeling comfortable with their financial situation might disregard this advice, assuming it only applies to those that don’t have as much financial stability.

The truth is that an Emergency Fund is something that everyone (even you!) should have. In addition, the added financial security planning of a Lifestyle Reserve should also be part of your financial plan. So, let’s explore exactly what an Emergency Fund is, how a Lifestyle Fund is different, and why both should be in place to ensure long-term financial alternatives and adaptability. Most importantly, I’ll highlight how this applies to Suzie & Trevor Hall (The Accumulators) and Jim & Carol Oates (Almost Ready to be Retirees), so you can see how it can work for you.

What is an Emergency Fund / Rainy-Day Fund / Financial Cushion and Why do I Need it?

Let’s talk about an Emergency Fund, which is often used interchangeably with Financial Cushion or Rainy-Day Fund. They are close but have slightly different purposes. An Emergency Fund / Rainy-Day Fund is a safety net for unexpected financial surprises; this could be an immediate need to replace a furnace or roof, an unforeseen job loss, or a medical condition requiring unpaid time off from work. An Emergency Fund / Rainy-Day Fund would generally be kept in cash in a separate account from day-to-day-expenses, usually in a high-interest savings account.

On the other hand, a Financial Cushion is more of a buffer to cover elevated or lumpy day-to-day or month-to-month costs like a higher than usual heating or grocery bills, etc. A Financial Cushion is often kept in the main bank account in cash, just to keep a financial safety margin-of-error to allow for a secure feeling about covering regular expenses.

Whether we say Emergency Fund or Rainy-Day Fund or Financial Cushion, they are similar, so let’s simplify the definition: a liquid/cash reserve to cover unforeseen and unbudgeted for expenses which allows for financial stability and peace of mind.

You may already have this is place, without formal planning. The next question you should ask yourself is whether you’ve set up your Emergency Fund / Financial Cushion in a way that truly provides the stability and comfort that you need.

Before we dive into that, let’s hear what New York Times Bestselling author and one of MarketWatch’s 50 most influential people, Morgan Housel, shared in his book, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness:

“The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future.”

How much should my Emergency Fund be?

So, let’s explore some questions about an Emergency Fund:

  • How much of an Emergency Fund / Financial Cushion is needed?
  • How long will it take to build a strong Emergency Fund /Financial Cushion?

I know you hate to hear it but, as with many financial planning questions, the answer is “It depends!” But I won’t leave you hanging; let me give you an idea of factors to consider when building your Emergency Fund:

  • Current and Future Financial Outlook: Have you just started a new business and don’t have a good handle on your upcoming income? Alternately, do you have a stable job that you feel fairly confident on relying on that income for the foreseeable future? Another consideration is potential upcoming surprises – Is a new baby on the horizon? Will your grown kids need financial support? Do your properties and/or vehicles have any approaching maintenance or replacement needs? Or, do you have parents who may need financial support as they age? Keeping these, and other potential unforeseen expenses in mind, will help you determine the ideal size of your Emergency Fund; at least 3-6 months of necessary expenses is ideal, but a 1-month Emergency Fund might be appropriate, in some financially stable situations.
  • Risk Tolerance: The size of your Emergency Fund / Financial Cushion is also dependent on your own personal financial risk tolerance. Although some people may feel completely comfortable with 1–2-months of necessary expenses for their Financial Cushion, others may feel the strong urge to keep 12 months aside. Whatever the amount is that will allow you to sleep at night is a good indicator.
  • Balancing the Budget for Current & Future Needs: How quickly you can build your Emergency Fund is highly dependent on how much of your existing income can be diverted to fund it. That may mean reallocating a portion of your long-term savings or tightening the discretionary spending belt until you’ve built your Financial Cushion to the level of comfort you need.
  • Opportunity Cost: Some people want to hold too much in cash, which may be a financial security blanket, but keeping more than needed is detrimental in the long run because “money in the mattress” could be used to build wealth. So, when deciding how much your Financial Cushion should be, consider that keeping too much will cost you in lost investment opportunity.

To hammer home the importance of an Emergency Fund / Financial Cushion and the financial benefits it provides, let’s hear a little more advice from Morgan Housel in The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness:

“Saving does not require a goal of purchasing something specific. You can save just for saving’s sake. And indeed, you should … Saving is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment … Savings without a spending goal gives you options and flexibility, the ability to wait and the opportunity to pounce. It gives you time to think. It lets you change course on your own terms.”

“Six months’ emergency expenses means not being terrified of your boss, because you know you won’t be ruined if you have to take some time off to find a new job.”

Even though everyone’s talking about Emergency Funds and Financial Cushions (and that’s a great starting point), let’s look at the bigger picture and think about long-term financial security. To do that, we want to focus on Lifestyle Reserve.

What is a Lifestyle Reserve / Cash Wedge and Why do I need it?

You may have heard me talk about a Lifestyle Reserve in my previous blogs, Using a Lifestyle Reserve To Ride Out Market Storms and Play It Again, Steve – Timeless Financial Tips #6: Aligning Your Investments with Your Investment Time Horizon. A Lifestyle Reserve, or sometimes referred to as a Cash Wedge, is essentially enough money in safe investments to cover your spending needs; this can be (and often is) at retirement or it could also be needed to supplement income in working years to meet your lifestyle needs. For clarity, I’m talking about the lifestyle to which you’ve become accustomed or the level of lifestyle you want, which would include both “needs” spending (non-discretionary) and “wants” spending (discretionary). So, your lifestyle needs would include vacations, club memberships, gifts to kids, charitable donations, etc.

A Lifestyle Reserve / Cash Wedge should be secured in a low-risk manner: cash or high-quality, short-term fixed income investments, which may produce a lower-than-expected return on investment but is exposed to significantly less volatility to ensure that your principle is preserved. Continue Reading…

How to open a successful Self-Directed IRA [in the U.S.]

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You must have a functional account that is easy to use to efficiently manage your retirement savings. Discover how to open a successful self-directed IRA.

Image courtesy of Logical Position

By Dan Coconate

Special to Financial Independence Hub

Many share the goal of achieving financial security in retirement, yet the path to reaching this milestone is often full of uncertainty and complexity. Learning about smart investing is one of the most effective strategies for ensuring a stable financial future.

A self-directed Individual Retirement Account (IRA) offers Americans a flexible and powerful vehicle for retirement savings, providing the opportunity to diversify your portfolio beyond traditional stocks and bonds. Learning how to open a successful self-directed IRA presents a unique advantage if you are seeking control over your retirement future. [Editor’s Note: Available in the U.S., IRAs are most comparable to Canada’s RRSPs.]

Choosing the right Custodian

The choice of custodian is vital in setting up your self-directed IRA. A custodian is an IRS-approved financial institution responsible for holding and safeguarding your IRA’s assets. Since not all custodians offer the option to invest in all asset types available to self-directed IRAs, selecting one that fits your investment strategy is essential. Custodian fees can vary widely and may include account opening fees, annual maintenance fees, transaction fees, and asset holding fees. These costs can significantly impact the overall returns on your investment, especially over the long term.

Funding your Self-Directed IRA

Funding your Self-Directed IRA is a crucial step toward building your retirement nest egg. A direct transfer from an existing IRA into your self-directed IRA is often the most straightforward method, involving minimal paperwork and no tax implications. A rollover from a 401(k) can also deposit substantial funds into your self-directed account, but it’s important to be aware of the rollover windows and potential tax consequences.

Understanding the Rules & Regulations

Understanding the rules and regulations that govern self-directed IRAs is not just a recommendation; it’s a necessity for ensuring the long-term success and compliance of your retirement savings account. This comprehension should include familiarizing yourself with prohibited self-directed IRA transactions to understand the tax implications, potential penalties, and fees of your investments. Learning these rules will ensure that you remain compliant while maximizing your IRA’s potential.

Choosing your Investments Wisely

You must choose wisely to financially prepare for retirement with the freedom to invest in multiple assets. Making informed investment decisions is one of the most crucial strategies for your self-directed IRA’s success. This decision must involve researching potential investments, understanding the market, and considering your overall retirement strategy. Strategic diversification and due diligence play key roles in achieving long-term financial growth and security. Continue Reading…

Maximizing Income: 15 Strategies for Accelerated Wealth Creation

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Photo by Karolina Grabowska on Pexels

We’ve gathered the wisdom of successful entrepreneurs and financial experts to reveal their strategies for accelerating wealth accumulation. From focusing on high-leverage activities to applying the 50/30/20 budgeting rule, explore the diverse tactics shared by fifteen professionals, including founders and CEOs, on how to maximize income and expedite wealth building.

  • Focus on High-Leverage Activities
  • Diversify Your Income Streams
  • Live Beneath Your Means
  • Invest in Real Estate
  • Turn Passions Into Online Business
  • Leverage Offset Mortgages with Stoozing
  • Build a Collaborative Business Model
  • Pursue Passionate Side Hustles
  • Specialize in In-Demand Niches
  • Invest Earnings in Business Ventures
  • Hire a Specialized Tax Specialist
  • Automate Savings to Investment Transfers
  • Document Achievements in a Brag Book
  • Combine Education with Financial Investing
  • Apply the 50/30/20 Budgeting Rule

Focus on High-Leverage Activities

The best way to maximize your income and expedite the process of building wealth is to focus on your highest-leverage activities and outsource everything else. When you’re doing everything yourself, you can only do so much. But when you delegate as much as possible, you can focus on your core competencies and grow your business faster. This is something I’ve learned the hard way. In the past, I used to do everything myself.

But as my business grew, I realized that I was spreading myself too thin. So instead of trying to do everything, I hired people to do the things I didn’t enjoy or wasn’t good at. This allowed me to focus on my strengths and grow my business faster. For example, I used to spend a lot of time writing blog posts and creating content. But now I have a team of writers who do that for me. This has freed up a lot of my time and allowed me to focus on marketing and growing my business. — Matthew Ramirez, Founder, Rephrasely 

Diversify your Income Streams

One effective approach I’ve used and recommend is diversifying your income streams. By expanding your sources of income beyond a single stream, you can create a more stable and potentially higher-earning financial foundation. Explore avenues such as investing in stocks, real estate, or offering freelance services.

One way I diversified my income streams was through investing in stocks. I researched and identified companies with strong growth potential and invested a portion of my savings in their stocks. Over time, as the companies performed well and their stock prices increased, I earned capital gains and dividends.

This additional income from my investments complemented my primary source of income and contributed to building wealth. By regularly monitoring the market and making informed investment decisions, I was able to maximize my earnings and accelerate my financial goals. — Sacha Ferrandi, Founder & Principal, Source Capital

Live Beneath your Means

Eschew lifestyle creep, which can hamper you from building wealth. Instead, live beneath your means by comparison shopping, creating and sticking to a budget, and funneling savings, raises, and additional monies received into an emergency fund, savings vehicles, and investments.

For example, comparison shopping for your auto and home insurance can save you hundreds of dollars a year. The same goes for negotiating interest rates with credit card companies and rates for other services. Instead of spending that extra money, boost your savings account or open a CD account.

If your employer offers a 401(k) plan, build your wealth by increasing your contribution to it whenever you receive a raise. Be sure to take advantage of the maximum amount if your employer offers a 401(k) match. — Michelle Robbins, Licensed Insurance Agent, Clearsurance.com

Invest in Real Estate

Making real estate investments became my cornerstone strategy for building substantial wealth. Strategically acquiring properties in prime locations and astutely capitalizing on market trends paved the way for a transformative financial journey. Through shrewd decision-making, I cultivated a stream of passive income from rental properties and witnessed significant appreciation in property values over time. The enduring nature of real estate investments proved to be a resilient and effective avenue for wealth accumulation.

By leveraging the power of property ownership, I secured a reliable income source and tapped into the wealth-building potential inherent in real estate. This strategic approach allowed me to navigate the complexities of the real estate market, aligning my investments with long-term growth prospects and contributing significantly to the acceleration of my overall wealth-building objectives. — Bill Lyons, CEO, Griffin Funding

Turn Passions into Online Business

I developed my personal finance site into a thriving business that has been instrumental in helping me build wealth. After paying off my student loans, I launched the site to help other millennials manage money by sharing the frugal tips and repayment strategies that worked for me.

Years later, My Millennial Guide now earns steady revenue through affiliate partnerships and digital consumer banking offers relevant to my audience. I’ve built a sizable audience by providing quality and engaging money advice for free.

My own journey to financial freedom after conquering student loan debt has proven firsthand how lucrative launching an online business around your passions can be. The flexible income from My Millennial Guide provided the runway to leave my corporate job and focus full-time on site growth.

Now, rather than relying on a single income source, multiple automated revenue streams from this one company allow me to maximize earnings while making an impact by sharing financial advice. The wealth-building opportunities entrepreneurship provides are limitless.

I’m proud that the free resources and recommendations I’ve shared on My Millennial Guide have empowered thousands toward financial freedom, while also securing my own prosperous future. Turning my purpose into a business became the ultimate wealth vehicle. — Brian Meiggs, Founder, My Millennial Guide

Leverage Offset Mortgages with Stoozing

A pivotal strategy in my journey to Financial Independence was leveraging an offset mortgage with ‘Stoozing.’ This method, while requiring discipline, has the potential to drastically lower mortgage payments and accelerate wealth accumulation. Taking advantage of 0% interest credit card offers, I redirected these funds into an account linked to my mortgage. This not only reduced the mortgage balance but also minimized interest expenses significantly.

The essence of Stoozing lies in its ability to turn credit into a tool for savings. With over $100,000 deposited from credit cards, my mortgage interest payments plummeted. This approach demands meticulous management to clear the credit card balance before the 0% interest period expires. By doing so, I could fast-track my path to financial freedom by a decade, demonstrating the power of innovative financial strategies in wealth building. — Shane McEvoy, MD, Flycast Media

Build a Collaborative Business Model

To make more money and get rich faster in the legal field, it makes sense to encourage cooperation and build a group law firm instead of a solo practice. Lawyers with different types of skills can work together in collaborative law firms. Because they have different skills, their members provide a range of legal services.

Collaboration allows firms to offer more services, which speeds up growth. When the team is more diverse, the firm can assist more clients and handle more complex legal cases. Working together can bring in more money and help individuals get rich faster. Help desk workers and lawyers share computers, filing cabinets, and office space in a collaborative law firm.

By using the same resources, firms may be able to reduce costs and operate more efficiently. Collaborative lawyers can retain more of their earnings by cutting down on individual expenses. You can get rich faster and make money through smart investments if you know how to manage your finances well. Lawyers can become leaders in their field by focusing on their expertise if they work together. People with specific legal needs should choose this firm because it specializes in those areas of law. Dominating a niche might enhance your legal reputation. Wealthy individuals are drawn to the firm because it has a large market and charges a premium for its specialized services.

Collaborative law firms can showcase their array of services and lawyers’ expertise by representing themselves as a one-stop shop for all your legal needs. This branding strategy makes the firm stand out in the competitive legal market. Effective branding positions the company as an authority, which attracts more clients. As more clients and business opportunities arrive, you make more money and build your wealth. — Martin Gasparian, Attorney and Owner, Maison Law

Pursue Passionate Side Hustles

What I have learned is that as you grow in your career and acquire new skills, this will help you to think about other avenues to travel to bolster your income. Take, for instance, I always wanted to be an adjunct professor, but it was a true process. It did not happen overnight. It took time. We can’t rush the process because once we get there in a hurry, then we can’t stay there. The goal is to get there and have the foundation to remain. Continue Reading…

Managing a Windfall: Sudden increases in Net Worth and how to handle them

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Image courtesy Pexels/Tima Miroshnichenko

By Devin Partida

Special to Financial Independence Hub

The initial excitement of suddenly receiving an inheritance, lottery win or large bonus is palpable, presenting what seems like endless possibilities. However, this euphoria gives way to the daunting reality of managing significant amounts of money.

You face complex decisions that involve managing your new wealth responsibly and planning for your future in ways you might not have considered before. This transformative moment calls for careful consideration and strategic financial planning to ensure your sudden wealth leads to long-term security and success.

The Reality of Sudden Wealth

Many people believe sudden wealth is a one-way ticket to lifelong happiness, but the reality is far more complex. Despite the number of U.S. adults in the upper-income tier rising from 14% in 1971 to 20% in 2019, managing significant financial resources introduces many new challenges.

You might think money will solve all your problems, but it often brings issues, including increased responsibility, potential isolation and the need for meticulous financial planning. Instead of viewing wealth as a simple solution, recognize it as a valuable tool requiring savvy management to benefit your life. This approach ensures you handle your finances wisely, considering the intricate balance between enjoying your wealth and maintaining it for the future.

Understanding the Psychological Impacts

When you receive a sudden windfall, confusion and stress quickly cloud the initial rush of joy as you face unexpected financial decisions. People sometimes refer to this whirlwind of emotions as “sudden wealth syndrome” — a phenomenon that can lead to anxiety, poor judgment and hasty financial decisions.

Taking deliberate steps is crucial to maintaining emotional stability. They include the following:

  • Pause and allow yourself time to adjust
  • Consult with a financial advisor and tax expert
  • Seek support from professionals or support groups

These help you manage your new circumstances wisely and guarantee you make the most of your windfall without emotional turmoil.

Practical steps to manage a Windfall

Create a budget tailored to your new financial situation to manage a sudden windfall adeptly. Start by calculating your net worth to gain a clear understanding of where you stand money-wise. Before making any major decisions, place your funds in a temporary, safe location like a high-yield savings account to ensure they remain secure while you explore your options.

Additionally, take the time to educate yourself on financial management and investment strategies. Enhancing your knowledge in these areas will empower you to make informed decisions that align with your long-term financial goals. This proactive approach will help you maximize the benefits of your newfound wealth.

The Importance of a Structured Financial Plan

A comprehensive financial plan is essential to manage and sustain your wealth effectively. Harness the power of technological advancements like AI and machine learning, which can predict upcoming financial trends and assess investment risks precisely. Moreover, seek the expertise of professional financial advisors who can tailor a plan specifically suited to your unique needs and goals. Continue Reading…

Conquering Retirement Fear: from Apprehension to Adventure

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Many dream of retirement, but as the big day approaches, some experience a surprising emotion: fear. Billy and Akaisha Kaderli, your guides to navigating retirement, delve into the anxieties that can lurk beneath the surface of financial preparedness.

RetireEarlyLifestyle.com/iStock

By Billy and Akaisha Kaderli

Special to Financial Independence Hub

All of your ducks are in a row.

You have saved and carefully invested for years, and the personal discipline is about to pay off.

So why is there apprehension in the bottom of your belly? Let’s be honest. There is risk involved, and the future no longer seems certain or familiar.

“What if I forgot about something?” you think, and start going over every plan you have made.

No one likes to admit straight out that they are afraid of retirement. Why, that sounds silly. But changing your life from one of being focused on work duties, raising a family, paying bills, and receiving that dependable paycheck every week to one of the virtually unknown has its own set of stresses. You’re being dishonest if you say it’s not a big leap mentally, emotionally, or financially.

Lack of confidence often underlies questions disguised as logistics on how to retire. Sometimes, one must simply take the leap of faith, making a companion of the ever-present question “What if?”

If you have spent your whole life building security and providing that same security the best you could for your family, then stepping into the unknown world of retirement is like jumping off a cliff.

Even if you’re as prepared as you think you are.

Sure, we can distract ourselves with dreams of endless golf, or margaritas on an exotic beach somewhere, but when it’s quiet, we find ourselves looking over our shoulders, wondering whether some forgotten component is lurking just out of sight.

“What if I run out of money?,” you whisper to yourself.

Perhaps your personal fear-mongering nemesis is health care in retirement, your portfolio balance or even something as simple as boredom. There can be great comfort gained from all of one’s time being planned out months in advance.

Going sailing, Boracay, Philippine Islands

Going sailing, Boracay, Philippine Islands

To expect retirement to be free of hitches or snags is unreasonable. There are no guarantees in life. None of us knows what the future will bring, and this is true whether you’re working or retired. Continue Reading…