April is National Financial Literacy month, and as a financial planner, I look for opportunities to teach the next generation basic financial skills. Next week, I am heading to my alma mater, Michigan State University, where I will meet with students and faculty and be a guest speaker for a personal finance class. One of the concepts that I will share with the students is one that I cover with all of our clients: financial stewardship and what it means to be a good steward with your finances.
To me financial stewardship boiled down to its simplest meaning is to be responsible with money. How are you making smart and prudent decisions that are financially healthy for yourself and others in your life? Being a good financial steward promotes financial well-being.
Start with building your financial foundation
While there are many aspects to financial stewardship, it begins with building a strong and healthy financial foundation. When I stand in front of the students at MSU, I will cover the three elements of your financial foundation. No matter how old you are and what your circumstances are, your foundation must have:
- Good and positive cash flow. This means spending less than what you make and maintaining zero to low balances on credit cards. Saving proactively for your short, intermediate and long-term goals also makes for healthy cash flow. My approach starts with asking people to review their expenses and then come up with a budget. I know a budget can be a “four letter word” for some. But there is much to gain. Next, I teach people to “pay themselves first”. Which means to make saving a top line budget item, not something that only happens If there is cash left over. It’s hard for some at first, but like lifting weights or eating healthy, it gets easier as the habits are built.
- Ample cash reserve. Comments abound on the internet about how many months of living expenses you should have. The common range quoted is between three and six months. I don’t think it’s that simple. The number of income earners and dependents in the household, along with an understanding the investable assets and liabilities will impact this decision. For instance, a family with a single income earner may want to aim on the higher side of the range. A household with dual income earners might get by with less. Of course, the risk tolerance for each individual will impact this decision, too, as some people have peace of mind having a certain amount. The bottom line is to give proper thought and consideration to your cash reserve and set the money aside.
- Adequate insurance coverage. This includes health, disability, life insurance, and long-term care. Insurance is there to protect against a risk. Take disability insurance for an example. Most employers offer disability. In 99% of the cases I have worked on, the coverage range is between 60%-66% of your taxable income. If you lost your ability to work, you would lose approximately 33% of your income. Have your expenses decreased? Likely not! A holistic planner will work with you to see if current assets would cover this gap or if more insurance, which can be applied for individually outside of work, can be obtained. Life insurance is another key coverage to have in place. What happens to the financial goals of a family if someone dies? Do you have proper coverage in place to help provide funding? As a planner, I review the policies in place, the assets on hand and the goals to see if there is proper insurance or if a client needs more coverage
You don’t get fit overnight
While it may seem overwhelming, or perhaps less exciting, to tackle these three elements, you just need to take the first step. I liken the experience to doing a workout program at a gym. You want to get fit, improve your health; you don’t start with the most amount of weight or the hardest exercises. A trainer will start with some basics upon which you can build. Then, as you gain knowledge and confidence, you build your strength and fitness, seeking guidance when you need it as you set more challenging goals.
Personal finance works the same way. Too often individuals want to talk about the non-foundation items such as the allocation in their accounts, buying an exciting growth stock, or understanding their stock awards from an employer. I get it! Those are fun. And we will get to those. But I feel strongly that you need to start with the foundation items first --- mastering cash flow, building and maintaining a cash reserve, and securing insurance --- and then build up from there.
With this healthy foundation in place, you are on your way to becoming a good financial steward. It’s never too late to start, so I encourage you to take the first step. I look forward to helping the students at Michigan State start on this positive path, too.