What does your Road-map look like?
When we talk about savings, investments, retirement and many other financial matters, the discussions frequently have a distant, futuristic tone. We study long term rates of return, forecasts of spending and saving, and future predictions about income and estate taxes. But how often to you stop to see where you are today on the road map to life and financial freedom? For many, the answer is never, and they cruise through life simply assuming that they are saving enough, spending the right amount and investing in a way that will give the best chance of meeting their investment objectives.
With winter cabin fever sure to set in soon, this may be the best time of year to see if what you are doing matches what you need to do to reach your objective. The two biggest problems that many encounter are spending too much and saving too little. With all of the tax information that recently arrived in your mailbox, you now know exactly how much you made last year. Some simple math can give you a rough estimate of how much you saved. Start with your gross income and subtract any taxes that you paid in for estimates or through withholding and that would give you your net after tax income for the year. This is how much you have available for spending.
Now reduce your net spendable income by any retirement savings, such as 401K, 403B, 457 or personal retirement plan such as an IRA or SEP. This net number is now what was available for personal savings and spending for living expenses and lifestyle. This is frequently a good wake-up call for everyone, but the numbers don’t lie. You either saved the money or spent it.
We can use your net spending number in a couple of ways to help. First is to make sure that this is the number that is used for any financial independence forecasting that you are using. If you guesstimate a number which is artificially low it may cost you down the road in that you may run out of money or need to significantly reduce your style of living. Keeping a check on, or at least knowing your exact cost of living is a good practice. This is something that you can start today.
Use this time to tally your annual savings from last year, and see if that is the amount that is advised for you to reach your objectives. If you don’t know how much you should be adding to your nest egg each year, shame on you. Figure it out.
Also give a check on your investments. After 2013’s performance, most people that I meet think that they are investment wizards. But what got you through 2013 may not be what is going to help you reach your required rate of return in 2014. Take a careful look at all of your holdings and be sure that your allocation can keep you resting well at night, especially as volatility increases.
This article was written by John P. Napolitano