Psst. Got any hot stock tips?
Photo: Viktor Hanacek. Source: Picjumbo. CC0
Lots of people want advice about what stocks to buy or what the market will do. But what they really need is guidance on how to plan out their finances.
Classically, finance has three major reports: income, assets, and cash flow. Each of these areas has inflows and outflows—positive and negative entries. An income statement covers income and expenses; a balance sheet shows assets and liabilities; with cash flow there are inflows and outflows. Investment advice just addresses the asset side of the balance sheet—a small part of our total financial profile.
For most of us, planning is pretty simple. When we’re young, we need to manage our income and expenses to save as much as we can and invest that. Ten to fifteen years from retirement, we need to get serious about asset allocation. But for most of our lives, our human capital is worth a lot more than our financial capital.
But simple isn’t easy. It’s one thing to talk about saving, it’s another thing to do it. Saving requires us to invest in ourselves when you’re young and avoid frivolous purchases and expensive credit card debt. Sticking to a budget is critical. As we grow older, it’s more important to manage risk. Time is no longer on our side. The last ten years of saving are the most important, because that’s when the magic of compound interest kicks in. For example, if we are able to save $5000 per year for 50 years and earn 6% per year, we’ll have $1.5 million at the end. And our assets almost double the last 10-year period. That’s why it’s so important to start early.
That’s why web sites and robo-advisors may work for young people, but they’re not so hot for folks approaching retirement. Because it’s not just about what we make. It’s also about what we keep.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”