Want what I want, when I want it
I read so much about saving money and living a frugal life but I must admit, I wonder how sustainable that lifestyle is for many.
I’ve lived that life. Like… “hardcore”.
Since I’m still taking a break from the work world at 52, I’m trying to figure out a real strategy for saving more or drawing on some of my retirement funds early.
As I read the mantras of skimping on expenses, I totally get it, and I’m never judgy about that kind of stuff. If you don’t stand to inherit a nice lump sum from rich parents, it’s almost a necessity.
However, after looking back at my own 30 years of tracking my net worth and its’ ups and downs, I remember specific times where I “needed” to tap into that money.
I’m not talking “Emergency Fund” money here either. It was usually for a “new goal”. A house, or a vacation home, or starting a business or buying a few new flat panel television sets
Well, I’m there again and that’s why these days I’m preaching caution.
3 Pools to take a dip
We basically have 3 pools of retirement money. Mine, my wife’s and what I call my “Paper route” money.
This is an account that I’ve funded with money that accumulated from the days that I shared a paper route with my buddy in Jr. High school.
Taking this time off of work has made me a MUCH more conservative investor. Possibly too much so, but right now, I feel more comfortable without seeing big dips in my account balances even if I still won’t be tapping the majority of the funds for another 10 or 15 years.
If you think you’re going to want to use that money in less than 5 years, you REALLY need to think about preserving your capital.
That basically means having a bigger chunk of your portfolio in cash or a much less volatile investment.
I know that sounds sacrilegious to many who are trying to teach others about personal finance, but it’s true.
Another thing to remember is to not be so worried about paying a penalty for early withdrawal. As I was recently riding the stock market wave higher, I was still moving a bigger percentage to cash. I was also making a hedging bet that the market might come down a bit. This paid off in early February and put me right where I wanted to be.
Over the past 4 months, I made the equivalent of what the 10% penalty would have been if I had stayed in 100% cash.
With having the 3 accounts earmarked as, moderate risk, index funds and “paper route” money, I can visualize a different time horizon on each account and I can ride out investment choices with a longer timeline.
As steadfast as I’ve been with my frugality, over a 30 year period I’ve had mini-lapses where I decided I needed a chunk of money for one thing or another. (you have to live life, right?)
I just don’t know if a lot of people understand that these needs will probably pop up for everyone sooner, or later. Divorce, Graduate school, Health requirement it could be anything that doesn’t fall into the category of “Emergency funds” and these desires WILL arise…trust me.
You hear so many stories about people using their home equity as an ATM when the value rises or removing money for a trip that they’ve always been dreaming of. I’m just saying, have the hard conversations with yourself and your partner about if you really can stay “fully invested” for more than 5 years.
Practice safe investing by avoiding these 2 things
Two recommendations for people, if you think you’re going to need that money in less than 5 years.
- Don’t go “cowboy”
By “cowboy” I mean, doing what I’ve done in the past. Like putting an oversize portion of your money (anything more than 4 to 5% of the total) and thinking you’re going to hit on a winner.
Trust me, you will most likely lose 9 out 10 picks when you try to do this.
2. Don’t think you can “time the market”.
Don’t think (even if the market hits correction territory) that you can make a quick move into a certain area, thinking you can get out quickly on a bounce.
You’re tempting fate if you do that. I’ve tried this myself in the past, and sometimes, when the market goes down 5%, it has gone down an additional 20%. Often, it’s very difficult to dig yourself out of a hole like that, or it can take years. Especially, when you’re talking about buying stocks that are already very high in valuation.
If you catch yourself doing either of these things, step away from the computer, put your money in 100% cash, and simply add more saving to that base amount.
At the end of the day, we all want to have a good time with our money, but, please, practice safe investing and you’ll wake up a lot happier in the morning.