Saving and investing are two of the most important things we do with our money. There’s a lot we can learn from how Chief Financial Officers (CFOs) do it.
It’s a CFOs job to invest corporate assets (or decide not to). They must manage today’s financial needs and the company’s future needs. They’re constantly working to maximize efficiency, profitability, and long-term value. Where’s the best place to invest corporate assets? Where are they most needed? What can we afford to do? What can we afford not to do? These are just some questions CFOs must answer.
And it’s not that different from you and I. Each of us must balance our immediate financial needs with our future needs. We must prioritize how and where to save and invest our money.
As a financial advisor, I’ve been helping people make these decisions for over 20 years. I’m honored to be named to Investopedia’s list of the top 100 financial advisors many years running. My goal is to give you some actionable ideas for taking a more business-like approach to your saving and investing.
Here’s what we’ll cover:
- The three stages of our financial lives
- The role of goals and values
- Your risk profile
- Understanding asset allocation
- Saving money
- Investing money
Let’s get started.
The three stages of our financial lives
Businesses begin as startups, continue through the growth stage, then on to maturity, and finally renewal or decline. We’re all unique individuals, but we go through the same three stages of our financial lives. The first is protection, the second is accumulation, and the third is distribution.
In the protection stage, we set our financial foundation, which is built on cash, insurance, and legal protections. The accumulation stage is when we save and investing for our financial priorities. In the distribution stage, we design a retirement income stream that will last for as long as we need it to.
Saving and investing is key to our financial success.
The role of goals and values
Companies establish their core values and spend a lot of time planning and setting goals. CFOs handle the financial aspects of a company, and must take the organization’s goals and values into account when deciding about how best to allocate financial resources.
For individuals, it’s important to know where you want to go, and how you’re going to get there. Goals tell us where we want to go, values tell us how we’ll get there.
Your risk profile
Risk is the likelihood the investment you make gets the return you expect. For example, if you’re expecting a 5% rate of return, what’s the likelihood of getting it?
Informed by your risk tolerance, your investor profile seeks to help you determine your asset allocation. If you’re okay with risk, you’ll have a more aggressive investor profile. If you don’t like a lot of risk, you’ll have a more conservative investor profile.
There are five traditional profiles:
- Moderate Conservative
- Moderate Aggressive
Your profile can remain static throughout your life, or it can certainly change. It can adjust as you get older, and/or it can adjust as you learn more about investing and have more experience.
Simply getting to know more about what kind of investor you are is a really important starting point.
What kind of investor are you?
How do I know what kind of investor I am and what my risk tolerance is? You’ll need to complete a risk tolerance profile.
You can find and download our Risk Profile worksheet.
Your profile will help you determine your asset allocation.
Understanding asset allocation
Asset allocation is the term used to describe the investments (Asset classes) you own. Often, an asset allocation will be created based on the answers from your risk tolerance profile.
A common asset allocation is a 60/40 allocation, meaning 60% of your investable assets are equities (stocks) and 40% are fixed income (bonds).
Here’s another example:
20% Real estate
It’s simply the term used to describe your mix of assets/investments.
Asset classes are groupings of similar investments.
- Equities (stocks, stock mutual funds, stock ETFs)
- Fixed income (bonds, bond mutual funds, bond ETFs)
- Cash and cash equivalents (checking, savings, money market accounts)
- Real estate (primary residence, investment real estate)
- Commodities (precious metals, oil, etc)
- Currencies (traditional)
- Private businesses
- Crypto assets (cryptocurrency, NFTs)
For a business, revenue – costs = profits. For individuals, earning – spending = savings. Saving is your ability to have money left over after you’ve paid all your bills and made all your expenditures.
Businesses and individuals must always have to have enough cash to meet immediate needs and expenses. Everyone has to pay their bills.
How much cash on hand to have is up to you. My recommendation is to have at least six months’ worth of expenses saved in your emergency fund. That amount gives me financial peace of mind. You’ll need to make that decision for yourself and your situation.
Cash savings meet your short-term needs. You pay your monthly bills and any other expenses that life throws at you. Because you need to have immediate access to your cash, this money should be kept in a checking, savings, or money market account that’s separate from your every day checking account. It should not be invested; the last thing you want is to need your money only to have the balance reduced by market fluctuations.
Savings can be grown through investing, which requires that the money be put at risk. Once you’ve got your six months saved, it’s time to invest.
Investing is buying assets that increase in value and provide a return. In order to reach our financial goals and objectives, investing our money is required.
The major difference between investing and speculating is the amount of risk. Speculation can be thought of like gambling, whereas investing is based on research and the known fundamentals of the asset you’re putting money towards.
It’s useful to consider your time horizon when deciding what and where to invest. If your savings/investing objective will happen within three years, it’s prudent to have your money invested in cash or a very conservative investment. No one knows what the stock market will do tomorrow, and you don’t want your money at risk.
Your short-term time horizon is zero to three years. Mid-term is three to 10 years, and long-term is 10+ years.
We talked about asset allocation (your investment mix), and it’s also important to understand asset location. Simpy put, it’s where you hold the investments. Common examples are bank accounts, brokerage accounts, and qualified accounts. Since we’ve already covered bank accounts, I’ll focus on brokerage and qualified accounts here.
Also known as taxable accounts, a brokerage account allows you to buy and sell securities such as stocks, bonds, ETFs (exchange traded funds), mutual funds, and crypto assets. Common examples are Charles Schwab, Fidelity, and ETrade. You may also be familiar with upstarts, Robinhood and Acorns.
Qualified accounts are designed for retirement planning. Common examples are IRAs, Roth IRAs, 401(k)s, and pensions. There are limits to how much you can contribute each year, and when you can withdraw your funds.
I’m going to use time horizon to talk about common financial objectives as well as provide examples of account types and investment options.
- The down payment for a home: A taxable brokerage account can be an appropriate location. Selecting a low-cost ETF or mutual fund can make sense.
- Child’s education: A taxable brokerage account can also make sense here, as well as a low-cost ETF or mutual fund. You may also consider a 529 plan which is an account designed specifically for education.
- Retirement planning: A qualified account can be an appropriate location. Selecting a low-cost ETF or mutual fund can make sense. A taxable brokerage account can also be an appropriate location, particularly if you’re contributing the maximum amount to your qualified plan and would like to invest more towards retirement. Selecting a low-cost ETF or mutual fund can make sense.
Just as a CFO works to maximize efficiency, profitability, and long-term value, individuals must also do the same. Keeping your goals and values top of mind as you make savings and investing decisions is an important starting point. From there, you must know what kind of investor you are and how comfortable you are with risk. Next, make good decisions about your asset allocation, as well as your asset location.
While thinking about it in total can feel intimidating and confusing, taking it step-by-step will help you find success. Taking a business-like approach to your personal finances will help get you where you want to go.
If you’re ready to take control of your financial life, check out our DIY Financial Plan course.
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