Your Overall Financial Focus
Words by: Bryon Gragg
Published November/December 2012
As 2012 quickly winds down, it is time to review what has occurred in your life thus far this year and what needs to be done in the future. While reviewing your financial life, it is important to keep your focus balanced. I often get inspiration for these columns from the strangest places and events and this one is no different. While working out on an elliptical machine recently, I was monitoring my heart rate and the number of steps required to meet my goal for the session. As I pushed harder to meet the number of steps, my heart rate would rise to a level outside my target range. I knew I could continue to keep it elevated and achieve the number of desired steps but my heart rate was out of the target range. Thus, if I backed down too much, I wouldn’t meet my goal for number of steps. So most people are thinking, “What’s the big deal with steps and heart rate; doesn’t he have more to worry about than that?” In the overall scheme of things, it doesn’t matter, but it is something I track. And more importantly, it triggered the inspiration for this column.
As we look at the different parts of our financial lives, we need to keep the appropriate balance in focus. If you put too much of your focus on the growth assets or investment side and neglect the tax side, it could cause problems. Likewise, if you focus only on insurance and risk management and ignore growth assets or debt management, you are out of balance.
So what are some of the common ways to lose your focus and get out of balance? From an investment side, you should have an appropriate allocation of stocks, bonds and other fixed income that is right for you. As your portfolio fluctuates, there will be times when your allocation will change and require rebalancing. For example; if you have a portfolio that is 50 percent stocks and 50 percent fixed income or bonds, we refer to that as a balanced portfolio. If stocks perform well, your allocation may grow to 60 percent stocks and 40 percent fixed income. In that case, you would rebalance or bring the allocation back to your original percentages. A simple way to look at rebalancing is by selling high and buying low, which is not a bad way to go. You sell a portion of stocks while highly priced (you hope), and reallocate those proceeds to fixed income investments.
Another problem area concerns debt. Many people confuse debt reduction with financial independence. The truth is that you can have debt and be financially independent but it is also possible to be debt free and not be financially independent. A common focus is to be totally debt free without taking into account the other aspects of your financial life such as savings or growth assets.
Consider this possibility: Your entire focus is on having no mortgage and you use all available funds toward that goal while ignoring your growth assets and risk management. That sounds like a good plan on the surface. You’ve sacrificed and applied every dollar you can to reducing your mortgage … now you can state that you have no debt and you own the house outright. Congratulations! Now what about your savings? You have a house and no debt. Is this financial independence? Can you go to work only because you want to, or do you still have to work to pay living expenses? Do you have a safety net? What if you lose your job or your business takes a downturn? Banks aren’t too keen on loaning money when you don’t have a job or do have financial issues, and even if they do, you’ve got a mortgage again. Do you have enough put away for retirement or are you starting at zero? Is this considered financial independence? What could have happened during the journey to paying o† the mortgage? Did you have adequate life and disability insurance coverage should something have happened to you before you paid off the mortgage? This is an example of what can happen when you are focused on only one part of your financial lie.
The key is to keep all aspects of your financial life in focus; don’t get tunnel vision. Having tied all this together from a workout apparently proves that inspiration does come from perspiration, whatever the reason, so I hope you found something worth thinking about in this Financial Perspectives column.