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Personal finance priorities in down-times

Posted by admin on October 21, 2008 in Investment Strategy

There’s been a lot of talk recently about how the recent dramatic drop in the stock market has presented buying opportunities. Why I do not disagree with that analysis, we must ever be mindful of walking before we run. On the other hand, you have a segment of the public in a sheer panic, liquidating solid assets subject to a short-term decline in value into cash. This tension appears to be played out in the stock-market as well as the value hunters take over one day and the panicked the next. Up and down the market goes.

But removing some of the unnecessary noise piped in as of late, let’s not forget that prudent personal finance is built upon a pyramid of priorities from the most important building blocks at the base to the “sexy” decisions to buy bargain stocks at the top. As the cacophony of competing advice, suggestions and thoughts coming pouring in during these times let’s not forget these priorities:

1. What do you want out of life? Fundamentally, what you do with your money is dictated by what you what out of  life (not what you want to do, what you want out of life; huge difference). A childhood friend tells me the story of his uncle who changed jobs every 2 years and was never conventionally well off but what the uncle wanted was different journeys and adventures in life. He lived a simple life. Others want to be Alex P. Keaton (I date myself as a child of the 80′s). So, even if you don’t know to the detail, what do you want out of life- a life of leisure, a life of money, a life of adventure? The only wrong answer is someone else’s.
2. Where are you at? Its hard to read a map to know where you are going if you don’t know where you are at.  If you are getting dizzy with all of this talk about money and don’t know where to start, do this. Collect all your bills from the last several months and then take your pay stub.  Take a separate piece of paper for each month and draw a line down the middle vertically. In one half write “revenue” on the top and on the other write “expense.” Calculate the two. Now you know whether you are cash positive (revenue greater than expenses) or cash negative (expenses greater than revenue). Now do the same by calculating your net worth by adding up all your assets and subtracting it from your liabilities.
3. Be cash-flow positive every month. Unless you are retired and ceased to make income, everyone’s goal should be to be cash-flow positive. After all, why contemplate buying stocks or real estate at a bargain if you are cash flow negative every month? You have a cart before the horse at that point.
4. Set your goals. Now you are cash flow positive, set your goal on what you want to do with the excess cash. Grow it? If so, by how much? Give it away? To whom and who much? Set reasonable and time-specific goals. Don’t worry about the “how” question yet, worry about the “what” question (as in what is my goal).
5. Now execute your goals with product. Product is product to me. I have no favorite stock, mutual fund company or locations to buy real estate. Money has no emotion, only a rate of return. At this point, you get some advice and suggestions remembering your goals. Someone who wants steady returns at modest risk because they have 10 years before retirement does not buy penny stocks. Conversely, someone young and wants to buy a house, send their kids to post-secondary education etc. doesn’t horde cash only. If you do seek advice, make sure you settle 1-4 by yourself first.

Too often we chase #5 because it is the easy and fun one to answer. I would rather have to pick between stock in Coca-Cola or Pepsi than pondering what I want out of life. We also become easy prey because we focus on 5 and not 1-4. But life is a process as much as a result so you have to go through the steps before you decide on product. Just remember this during these times. Best of luck.