Life has its Challenges, Be Prepared
Notes From The Financial Shepherd
I find that there are many families that are stable with good employment, savings, and low debt levels – but who still demonstrate poor financial planning. This is one good reason to establish a board of directors and to be surrounded with other Financial Shepherds who support your life vision and want the best for you. One of the dangerous things about venturing into unknown territory is that you simply don’t know what you don’t know.
I’ve realized that pride is usually a big part of the reason why people do not ask for help when they need it. However, my perspective on seeking wise counsel is different. If the President of the United States—the most powerful position in the world—can humble himself enough to have a Cabinet, then why don’t we? For instance, he has the Secretary of Defense because he realizes that he does not know everything about defense; the same with commerce, education, and economics. People in stable families need to employ the same tactics. Remember there is an opportunity cost with every decision that you make, and it is important to know what that cost will be. Just because you’re doing well, doesn’t mean you can’t do better. When you are blessed to be a blessing and have extra resources to share, it is possible to do good and do well at the same time.
The Bible tells us in Philippians 4:5 to do all things in moderation. From a financial standpoint, that scripture is meant to keep us from extremes of lack or excess. I have a client who told me that she had been taught to have zero debt; none. She paid cash for everything, had no credit card debt, and even paid off the mortgage of her first home in 10 years. On the surface, this sounds like a really good thing. Fast forward a few years, and she wanted to move to a more prestigious part of town and was wondering how to make this happen. Her thoughts were to sell her home and take all of the earnings and invest in her new home, then sign up for a 15-year mortgage to pay it off faster. All of this sounds great, except that she had a few holes in her plan.
First, she did not have an emergency reserve fund; she only had a line of credit on her home. She also has a son who was 10-years-old at the time and she had not saved anything toward his education. At age 45, she would have to work until age 70 before she could retire comfortably because she had not saved enough in her retirement to cover her living expenses. So I recommended some changes in her plan:
1. Save and invest. Put only 20 percent down on the new home and invest the difference. Her mortgage rate was 5 percent fixed for a 30-year loan (versus 4.75% for the 15-year, not including its deductible); and over the last 10 years the S&P 500 index has averaged over 8.5 percent.
2. Invest for the future. The payment difference between the 15- and 30-year mortgages was $900 per month. I recommended that she save that extra $900 to invest and help build a college savings fund for her son.
3. Earn rewards. She loved to travel, so I suggested she get a travel reward credit card and pay it off every month to get extra bonus travel points. She put everything on her credit card and paid it off every month and received multiple free airline tickets which saved her thousands of dollars per year simply by paying with a reward card. Just by taking some basic, straightforward steps, she was able to take a good financial situation and make it much better in addition to being much better prepared for the future.