Your Emergency Fund: How Much is Enough?

Not all goals are equal in their achievability. In fact, 92% of people don’t reach the goals they set.1 While goals can be difficult to achieve, they’re not impossible. However, the best way to set yourself up for success is to set meaningful goals.

A meaningful goal sets itself apart from a standard goal in three main ways.

1. It’s Specific and Measurable

The more specific your goal, the more likely you are to reach it. According to one study, setting specific goals led to a higher performance 90% of the time.2 The reason for this is fairly simple: the clearer the path, the easier it is to follow it to the final destination.

I hear so many people tell me their goal is to save more, spend less, or build a retirement fund. The problem with these goals is that they lack specificity. Saving more could mean saving $10 per month or $1,000 per month. You can’t track your progress or know if you’re on track toward your goal if you haven’t specified it and you can’t measure your progress.

One of the first things I tell clients is to make their goals as specific as possible. For example, instead of “build a retirement fund,” you can specify it to “build a retirement fund of $100,000.” Finally, make it measurable—”build a retirement fund of $100,000 by age 45.”

2. It’s Relevant to Your Life

A goal is only meaningful if you’re passionate about it. Those who meet their goals do so not just because they’re hard workers, but because they are passionate about what they want to achieve. Their goals reflect their values and interests, rather than being random or something they think they’re supposed to achieve in life.

For example, some clients tell me they want to build their savings account because they’ve been told that’s what they should do. While true, you likely won’t feel very inspired to save more if you don’t have a reason for it that makes sense for your life.

I tell these clients to think of what having a savings account would mean for them. Would they feel they could sleep better at night? Would a savings account mean they could go on an annual family vacation? If they build a savings account up to a certain amount, could they finally upgrade their unreliable and problematic car?

Whatever your goal, you should be passionate about it and it should be relevant to your life, not what you think you’re supposed to achieve.

3. Frame it Positively

We’ve all heard about the power of positive thinking, and it translates to your goals, too. We are much more likely to work toward something we want to achieve or do rather than what we want to stop doing or don’t want.

For example, rather than a goal of “stop overspending” or “spend $200 less each month,” frame it in a positive light: “spend more mindfully” or “save $200 each month.” This can help you view saving as a good thing you’re supposed to do, rather than spending as a treat that you no longer should do. It’s easy to reverse any goal, so there’s no excuse not to!

Don’t Go it Alone

The process of setting a goal is just as important as the process of working towards it. Think of your goal as the frame of a house. You can’t build a stable home without the proper foundation and a clear blueprint.

If you’re struggling to achieve your goals or aren’t sure how to set ones that are meaningful, an advisor can help. As an independent financial advisor, my mission is to make a meaningful impact on the lives of my clients and the people they love. I help families make informed decisions with their money and pursue a strong financial future, from setting meaningful goals to guiding them along the path toward the finish line.

Contact me for a no-strings-attached meeting to discuss your goals, how to make them meaningful, and what strategies can help you pursue them. Call my office at (949) 221-8105 x 2128, or email me at michael.loo@lpl.com.

1 http://www.inc.com/marcel-schwantes/science-says-92-percent-of-people-dont-achieve-goals-heres-how-the-other-8-perce.html

2 http://psycnet.apa.org/record/1981-27276-001

Over the course of working with so many individuals and families, I’ve found that many people think financial planning, investing, and retirement planning are a sprint to the finish line. While on paper, maxing out your 401(k) each year and building an all-stock portfolio for maximum growth potential seems like a good plan, fast and big investing can actually slow down your progress to your goals. Let’s look at why.

The Dangers of Little Liquidity I always enjoy working with enthusiastic young couples who want to do everything in their power to reach their desired retirement. However, in the process of focusing on their long-term retirement goals, they neglect their short-term needs.

For many of my clients in their 20s and 30s, I may recommend contributing enough to their 401(k) to get the employer match, if one is offered, and contribute some of their paycheck to build an emergency fund and savings. This can help them avoid focusing so much on their long-term retirement goals that they neglect their short-term goals, from buying a house to paying off student loan debt. I generally recommend that my clients build a reserve fund that can cover three to six months’ worth of living expenses.

Dipping Your Toes In Versus Diving Head First

I said it earlier but I’ll say it again; investing and financial planning is a marathon, not a sprint. I’d much rather be the tortoise—slow yet steady and consistent—than the hare—fast yet unpredictable—when it comes to my investing strategy.

One of the more underrated strategies for financial security is making consistent and periodic contributions to your portfolio over a long period of time. As I mentioned earlier, younger individuals and families may not have the income yet to max out their 401(k), but they can make consistent contributions and increase them over time as their income increases. Like the tortoise, saving for retirement and other long-term goals is all about perseverance and consistency, even if it is at a slower pace.

It’s easy to let emotions get in the way, and many investors fall prey to the newest investment strategy that claims a higher return on investment. But the fact of the matter is, there is no controlling or predicting the market. I tell my clients that instead of focusing on what they can’t control, it’s helpful to focus on what they can control: the capital they invest.

Whether the markets are high or low, consistent contributions can have a powerful long-term effect. Additionally, maintaining a well-diversified portfolio and rebalancing if needed each year can help ensure your portfolio matches the appropriate level of risk you’re willing to take. Adhering to this motto and disciplined strategy can help you avoid the common trap investors fall into: buying high and selling low, and chasing high returns.

The Risks of Aggressive Investing

Too often, financial advisors tell young individuals in their 20s and 30s to keep close to 100% of their portfolio in stocks. The theory is that young investors have decades to ride out volatility and make up for any lost returns. While this may work for some individuals, I’ve had a number of younger clients who don’t feel comfortable taking such risks, even if they have decades to try to make up for losses.

Investing entirely in stocks isn’t necessarily the way to go, even if it makes sense on paper. It’s nearly impossible to entirely remove emotions from investing. Too often, I’ve seen investors give up when their portfolio takes a big hit. They lose motivation to keep investing, and they struggle to keep their eyes on the finish line of their long-term goals.

Incorporating investments, like bonds, that offer lower returns and lower risk, may help you feel more confident in your portfolio and avoid the rollercoaster of emotions if your portfolio takes a hit during a downturn.

Next Steps

Like the tortoise and the hare, fast investments don’t mean you’ll reach the finish line first. While it can be difficult, it’s important to tune out the noise of the media and focus instead on what strategies make sense for your unique situation, risk tolerance, and short and long-term goals. While not as exciting, I believe slow and steady can win the race, and without as many speed bumps along the way.

As an independent financial advisor, my mission is to make a meaningful impact on the lives of my clients and the people they love. I help families make informed decisions with their money and pursue a strong financial future. If you’re interested in learning more about balancing your short and long-term goals, I encourage you to reach out to me. Call my office at (949) 221-8105 x 2128, or email me at michael.loo@lpl.com.