On the surface, the cost of a financial plan is simple: generally between $2,000 and $4,000, depending on its complexity and where you live.
But dig deeper and you’ll find that the plan’s success also depends on you spending time to implement it.
Consider the case of a young physician who recently came to my office inquiring about a financial plan. His primary issues were cash flow with tax considerations, debt service and investment advice. I suggested he would also need an insurance review and estate planning, since he had none. At the conclusion of our getting-acquainted meeting, my colleagues and I quoted a fee for the financial plan and what it would include. He decided to work with us.
Next we had a goal-setting meeting and collected his pertinent financial documents such as his tax return, investment statements, debt statements and more. We provided risk-tolerance questions and discussed his short- and long-term goals in greater detail. Then there was an interim meeting where we reviewed his goals — to be sure we prioritized them correctly — his risk-tolerance results and his investment analysis.
A couple of weeks later, we had a plan-delivery meeting, where we reviewed the recommendations in all the areas of his financial plan. He took the binder home to review and start implementing the plan.
He returned in a month for a progress meeting. He had made some headway on our list of recommendations, but not as much as I had hoped for. At the conclusion of that meeting he told me: “You were very clear as to what the plan would cost me in dollars. What I did not know was the time it would take me to collect the information on which the plan is based, to meet with you, to read and study your recommendations and then to finally implement them.”
He was correct: It costs both time and money to enact a financial plan that will really help you. Eight months later, I received an email from the doctor, letting me know he’d completed all the recommendations. In the end he said the total cost, in terms of dollars and time, was well worth it.
Beware of additional costs
Keep in mind that with some financial service providers, there could be huge additional costs in the form of fees or commissions. This could also be a conflict of interest if your advisor recommends products that pay him more, rather than the ones that are best for you. So be sure you know exactly what fees are involved when you start working with an advisor.
While my recommendations in the doctor’s plan included specific changes to his insurance and investment holdings, I did not sell him any of the coverage plans that I recommended, nor did I sell him the investment products he needed. That’s because I am a fee-only advisor. I want my clients to know that I have no vested interest in the implementation of the insurance or investment part of the plan.
This is not the case for advisors who provide both a plan for a fee and then sell you the investments or insurance products as well. All too often, the insurance recommendations made by those who sell the products, too, include more and larger policies than what I would recommend. It is a sad fact that the commission may be driving the plan recommendations, rather than what is best for the client.
When you are looking for a financial plan, be sure that you use the services of a Certified Financial Planner and that the planner does not sell any products. To find such an advisor near you, contact Garrett Planning Network or the National Association of Personal Financial Advisors.
I think it’s safe to say that we all have the goal of one day reaching financial independence. That is, the point at which we have enough money in savings and investments to support ourselves for the rest of our lives. So, how much money is enough?
Most of the time that question is answered with a single big number. And it’s true that in the end you’re working towards a single total amount of savings and investments. But that total number is composed of many smaller numbers representing the savings you need to support each individual expense.
What if you looked at it that way? What if you broke it down by how much money you’ll need to support each expense, each habit, and each indulgence for the rest of your life without ever working again?
How Much Does That Gym Membership Really Cost?
Let’s look at a single expense. Say your gym membership. And let’s say that costs you $40 per month. How much money do you need in order to support that expense for the rest of your life?
Using the 4% rule, which says that you can withdraw 4% of your savings each year with minimal risk of ever running out of money, it becomes a simple math problem. Take the monthly cost, multiply it by 300, and you get your answer.
In this case, $40 multiplied by 300 equals $12,000. That is, you need $12,000 in savings to support that monthly gym membership for the rest of your life.
Values-Based Decision Making
Looking at it this way can help you make more informed values-based decisions when it comes to spending and saving.
For example, how long will it take you to save the $12,000 needed for your gym membership? And which do you value more? That habit or the ability to be financially independent a little sooner without it? What about a $500 per month car payment? That will require $150,000 in savings. Is that an expense you’d like to support?
There are no right or wrong answers here. The goal is simply to understand how each expense affects your savings need and to make decisions based on what you value.
How to Plan Differently
Next time you look at your budget, I would encourage you to do a few things differently. Consider the options related to each expense. For example, you could have a $500 per month car payment or a $200 per month car payment or take the bus, let’s say that is $50 per month or walk, $0 per month.
Then, for each category, multiply your monthly budget by 300 to see how much money you’ll need in order to support that expense for the rest of your life.
Finally, step back, look at the numbers, and think about how they align with what you truly want out of life. You may find that you want to cut back on certain things. Or you may find that you want to save more in order to support important expenses.
Either way, you’ll have a better understanding of what it takes to reach financial independence and put your money toward what is most meaningful to you.
Most personal finance advice misses a crucial point.
Lost amongst all the calls to cut coupons and skip your morning coffee is the fact that cutting costs isn’t the only way to get ahead.
In many cases, a raise can be far more powerful in helping you reach your biggest financial goals. And it may not be as hard to get as you think.
The Power of a Raise
Let’s say you currently make $60,000 per year and you’re able to negotiate a 10% raise (more on how to do this below).
Assuming that 25% of that new income goes to taxes, that means you now have an extra $4,500 to save each year, which is almost enough to fully fund an IRA.
Looking at it another way, that extra $4,500 represents a 7.5% return on investment, which is right in the range of what experts expect from the stock market.
So by negotiating a raise, you’ve given yourself a stock market-like 7.5% return. And unlike the stock market, that 7.5% return will be consistent year after year.
And if you’re investing that $4,500 each year, you’ll earn additional returns on top of your contribution. Assuming a 7% annual return, that investment will grow to $197,393 after 20 years and $454,828 after 30 years.
Plus the increased salary sets a higher baseline for future raises and for your salary at future jobs, making it more likely that your income will increase even further over time.
And all of that comes with pretty much no risk. As long as you present your case respectfully, the worst that happens is you get a no. And even then you’ll have planted the seed, which may make it more likely that you’ll get a raise in the future.
How to Get a Raise
Of course, the trick here is knowing how to negotiate so that you actually get the raise you deserve.
This can be intimidating for a lot of people, myself included! But the good news is that there are some simple strategies you can follow to strengthen your position and even increase your value in the eyes of your employer through the negotiation process.
My favorite resource on this topic is Ramit Sethi’s Ultimate Guide to Getting a Raise & Boosting Your Salary. Yes, the title is a little hyperbolic, but the advice is practical and solid.
And remember, as long as you present your case well, the worst that happens is you get a no. There’s little risk in giving it a shot.
Side Hustle for Extra Income
Getting a raise isn’t the only way to increase your income. People are increasingly turning to side hustles as a way to make some extra money on top of their day job.
There are lots of ways to do this, from dog walking to freelance writing to website design. It doesn’t have to take a ton of time, and even a little extra income can go a long way.
J. Money at Budgets Are Sexy has chronicled over 60 different side hustles real people have used to earn extra money. You can also check out the websites Fizzle and Side Hustle Nationfor ideas, inspiration, and practical advice on how to get started.
Invest in Yourself
Cutting costs is often the easiest first step towards saving more money.
But over the long term you are your own best investment opportunity, and finding ways to earn more money can make a big difference in your ability to reach your biggest goals.
Part of the reason we accumulate debt is that there are so many distractions in our lives things we want to buy but don’t need. But we also ring up debt because we simply don’t understand the flow of our income and expenses, so we can’t accurately estimate how much money we have available to spend.
I’ve struggled with this myself. A few years ago, I put in place a “Money Flow” system to help my family track our spending. You may have heard of a system like this before, but follow along on this tour, because it really works.
Putting the pieces in place
1. Set up two free checking accounts:
- One to pay fixed expenses (such as the mortgage, car payments and utility bills).
- One to pay variable expenses (groceries, gas, clothing and so on).
2. Set up a high-yield online savings account.
We call this our “curveball” account. It’s an emergency fund for use when life throws us curveballs — large medical bills, a job loss or reduction in income, major home repairs, that kind of thing.
3. Make a plan for big-ticket items.
My husband and I agreed that we would use one family credit card for large purchases, such as airline tickets and hotel stays. We still have our separate credit cards – it’s wise to keep your own credit cards to maintain your credit score and credit history. Using them once or twice a year should be sufficient. And don’t close those cards because it will eliminate credit history you’ve accumulated and affect your overall credit score.
Implementing the system
1. Draw up a budget for fixed and variable expenses.
Add up how much you need in each category. This will be your guideline for how much should be in each of your checking accounts.
Fixed expenses might include:
- Rent or mortgage payment
- Property taxes
- Utilities (gas, electric, water, etc.)
- Home, auto and umbrella insurance
- Life, disability and long-term-care insurance premiums
- Health insurance premiums (if not taken out of your paycheck)
- Cable TV, Internet, phone and cellphone
- Gym or yoga memberships
- Debt payments (credit cards, student loans, car loans, personal loans, etc.)
- Savings (yes, this is an expense — pay yourself first!)
Variable expenses might include:
- Eating out
- Personal services (haircuts, doctor visit copays, etc.)
2. Distribute money to the accounts.
When your paycheck comes in, allocate the designated amounts into each checking account based on the budget you created. The sum earmarked for the curveball account can go there directly.
3. Pay fixed costs directly.
All bills are paid automatically from our fixed-expenses account. We do not have to write any checks, and no debit card is necessary. This account has a cushion of a few hundred extra dollars in case a bill shows up unexpectedly or before we have a chance to replenish the account.
4. Pay variable expenses from the second account.
This account should have a debit card, which you can use for purchases.
5. Link the curveball account to either checking account.
If an emergency arises, you can transfer funds within 24 to 48 hours. You can then access the money with a check or debit card.
Realizing the benefits
Once I implemented this system, the process of tracking expenses wasn’t so cumbersome anymore. Separating expenses into fixed and variable categories meant I didn’t have to worry constantly about checking account balances. Having fewer transactions in each account also made it easier to see the bigger picture of our spending.
Already high, student loan debt creeps higher each year. In 2013, the average borrower who had taken out student loans graduated from college with $28,400 in debt, according to the Institute for College Access and Success. New estimates for the class of 2015 put that figure even higher, at $35,000.
Meanwhile, the average starting salary for new graduates with a bachelor’s degree is $48,127, according to the Society for Human Resources Management.
That’s a tough way to start your professional career. And if that’s what your situation looks like, it’s probably tempting to just make your minimum monthly payments and know that your debt will be gone in 10 years.
But that’s not the only way to go — and not necessarily the best way. Paying just a little more than the minimum each month can get you debt-free a whole lot sooner and save you a lot of money. To see just how big of a difference it can make, let’s crunch the numbers.
A few assumptions first
Here are the assumptions I made when analyzing the numbers for a typical graduate:
- Total debt of $35,000, all of which was a federal student loan disbursed in 2011 with an interest rate of 5%.
- A minimum monthly payment of $363 on a standard 10-year repayment plan (obtained using the Federal Student Aid repayment estimator).
- Annual income of $48,000 per year, with take-home pay of $3,500 a month (obtained using TurboTax’s TaxCaster).
How much money could you save?
Using these numbers, I ran three different scenarios through PowerPay (a great tool if you want to check things yourself). Here’s how it played out.
Scenario 1: Pay the minimums
The minimum monthly payment is $363, which is about 10% of take-home pay.
If you made every single one of those monthly payments, you would be debt-free in 10 years after having paid more than $8,500 in interest.
Scenario 2: Pay more
Say you found some creative ways to save money and increased your monthly payment to $500, about 14% of take-home pay.
You would be debt-free in just under seven years and you would save yourself $2,853 in interest. All of that — just for finding an extra $137 to put toward your debt each month.
Scenario 3: Pay a lot more
But what if you want to get really serious? What if you feel like your debt is an emergency and you want to get rid of it as soon as possible?
Well, if you could bump your monthly payment up to $1,000 per month, you would be debt-free in just over three years and you would save yourself $5,938 in interest.
And if you wanted to get really crazy and put 50% of your take-home pay toward your student loans ($1,750 per month), you’d be debt-free in under two years and save yourself more than $7,000 in interest!
What would you do with all that money and no debt holding you back?
The bottom line
There are some cases where it makes sense to pay only the minimums — especially if your student loan balance is much higher than your annual income and you could qualify for forgiveness (especially public service loan forgiveness).
But in most cases, the more you pay each month, the more you’ll save and the sooner you’ll be debt-free.
Why are you working so hard to make good financial decisions?
Why are you tracking your spending, living by a budget, paying off debt, building an emergency fund, contributing to a 401(k), and everything else you’re doing to improve your financial situation? What’s your endgame here? Have you thought about it? I mean, really sat down and thought about why you’re making all this effort?
I’ll tell you what, it’s not about making the “right” financial decisions. That alone won’t make you happy. And it’s not about having more money. A bigger bank account won’t automatically make you happy, and neither will all the stuff you can buy with that money.
What WILL make you happy is the time you can afford to spend because of the money you have in the bank.
True Financial Freedom
True financial freedom is the point at which you’re able to make decisions based on what makes you happy instead of what makes you money.
It’s the point at which you no longer need the next paycheck because you have the savings to cover it. It’s the point at which you can afford to take time off and travel the world or be home with your kids. It’s the point at which you can change careers because the new one is more meaningful to you, even if it’s not as financially lucrative.
Financial freedom doesn’t necessarily mean that you never have to work again. It just means that you’ve put yourself in a financial position where you’re able to spend your time in ways you enjoy.
What Does It Take?
So, what does it take to get to the point where your money allows you to spend your time as you please? First, it takes an understanding of what you actually want to be spending your time on. What excites you? What energizes you? Which people do you want around you? What missions do you want to be a part of?
Second, it takes an estimate of how much money you’ll need to be able to do those things, and when you’ll need it. It doesn’t have to be exact. Just a reasonable guess is enough to get started.
Finally, it takes a plan for how you’re going to save that money and consistent action to make sure that plan gets carried out.
And it’s really that last part that’s the most important. Consistently saving money is the key to giving yourself financial freedom. You don’t need to be a millionaire, but having money in the bank allows you to make decisions based on what makes you happy, instead of what makes you money.
How Will You Spend Your Time?
No one ever sits back late in life and reminisces on the money they made and the stuff they bought. It’s the things we experience, the people we love, and the missions we accomplish that make for a happy, fulfilling life. And if you’re smart about it, your money can give you the time you need to pursue them.
As a financial planner and fiduciary investment advisor, I work with people with varying goals and vastly different levels of education, income, assets and comfort with technology. I’m often worried by similarities I see among investors of all stripes.
Many people simply have no plan when they start investing. Others follow the latest hot investment tips from a stranger online, on TV or in a magazine. I’m surprised by how many investors think they’ve done well, but don’t know how to measure their true rate of return for the risk they have taken. Few investors even know how much risk is in their portfolios.
These issues arise because investors generally don’t use a consistent methodology — a repeatable, rule-based process — to build or monitor their portfolios. That often leads to portfolios that aren’t well-diversified, don’t have the appropriate amount of risk for the investor and aren’t tax-efficient. What’s more, many investors don’t review their portfolios and haven’t thought much about how their investments fit into a bigger overall plan.
Are you ready to invest?
What can you do to make sure you aren’t in this camp? First, determine whether you’re really ready to invest on your own. Based on my experience, there are a number of essential tasks to complete and issues to understand before you start investing.
Completing the following investing assessment can help you determine how prepared you are and whether you’d be better served by obtaining professional assistance from an objective, fee-only advisor.
1. I have a written list of my short-, intermediate- and long-term financial goals and know how much I need to save and the required rate of return to fund each of those goals.
2. I have completed a trusted risk assessment questionnaire tool (such as this one from FinaMetrica) and understand how my risk tolerance fits in with the required rate of return to fund my goals.
3. I have a written investment plan (investment policy statement) that spells out the asset allocation to be used in my portfolio along with the expected range of returns.
4. I understand the importance of asset allocation (the mix of stocks, bonds and other investments) and follow a methodology to identify and create a portfolio that is designed to provide the highest return for the level of risk that is appropriate for my situation.
5. I utilize a methodology to select the investments for each asset class.
6. I set aside time to regularly review my investments and make changes as necessary.
7. I utilize a methodology to monitor and periodically change the investments as needed.
8. I understand how tax inefficiencies will negatively impact my portfolio; which asset classes are best suited for tax-free accounts, taxable accounts and tax deferred accounts; and have structured my portfolio across these types of accounts to be tax-efficient.
Have you ever felt pressured to buy a house? Maybe from your friends, your family, your co-workers, or even yourself? Like you haven’t actually made it as an adult until you own your home?
It’s a common feeling, but the truth is that buying a house ISN’T always the right decision. In some cases renting is a smarter move, both for your wallet and your lifestyle. Here are four reasons why.
Life changes fast. That great new job you just started might turn into an exciting opportunity in a different city. That big family you planned on having might turn into a smaller one.
Renting gives you the ability to quickly change your living situation to best match the new realities of your life. That flexibility can be the difference between seizing an opportunity and having to pass on it.
Proponents of buying like to say that when you’re renting, you’re essentially paying off someone else’s mortgage. So why not buy and make sure that money is going towards yourself?
There is some truth to that, if you stay in one place for an extended period of time (typically 5-7 years or longer), then buying often results in the lower long-term cost.
In the meantime buying can be really expensive. There’s the upfront cost of the down payment. There’s the cost of handling the fixes and improvements that come with any new purchase. There’s the cost of new furniture. There are the ongoing costs of insurance, taxes, and maintenance.
Renting has costs too, but they’re often much smaller and more predictable, at least in those first few years. And in many markets where housing prices are high, renting can actually be a better long-term financial decision.
You can use this calculator from The New York Times to figure out just how long you would have to live in one place before buying became cheaper than renting.
Renting is often a great idea any time you move to a new place.
It gives you the opportunity to figure out which neighborhoods you like and which you don’t so that you can eventually make a buying decision you’ll be happy with for the long-term. There’s no sense in being stuck somewhere you don’t like simply because you felt rushed into buying a house.
Owning a home has plenty of benefits, but it can also come with a lot of stress.
Any time something needs to be fixed, it’s on you to either do it yourself or pay for it to be done by someone else. And of course there’s that big mortgage that can feel like a weight on your shoulders.
Renting comes with fewer commitments and fewer responsibilities, which can lead to lower day-to-day stress.
Make Your Own Decision
Of course, there is no right answer here. Buying is better for some people and renting is better for others.
The point is simply that renting isn’t just something you have to settle for until you can buy. In many situations it’s actually the smarter move.
As a financial planner, my job is to help people make smart financial decisions. That means planning ahead for big purchases, making rational spend vs. save decisions, and generally being purposeful and thoughtful with your money.
It’s a noble endeavor, but the truth is that we’re all human and we all make less-than-optimal decisions from time to time. Myself included. Here are three examples where I made decisions that were frowned upon by my financial planning alter-ego.
#1: The Big Indulgence
My brother got married. It was a beautiful wedding, lots of fun with friends and family, and he and his wife had a great time. It was also a little awkward for me. As the older, single sister at the time, I honestly felt a little self-conscious.
So what did I do? I spent a LOT of money on makeup: brushes, blushes, two types of foundation, extra eye shadows. I went nuts! It was an emotional decision through and through. It was way more than I “should” have spent, and certainly more than I had planned. But I wanted to look good and the makeup helped me feel comfortable. It may not have been the most rational decision, but it was certainly a human one.
#2: The Overextension
A few years ago I decided to start my business. And while I was excited about the possibilities for how it could grow, there was also a lot about it that I couldn’t really plan for. I didn’t know how long it would take to be profitable, how much of my time it would consume, or really anything else about what the experience would truly be like.
So of course I also decided to start remodeling my house at exactly the same time. Another project with a lot of moving parts, a lot of uncertainty, and a big investment of time and money. Tackling two big goals at the same time caused a lot of stress. I was worried about money, stretched for time, and initially couldn’t give either one the attention they deserved.
My financial planner alter-ego should have told me to take one thing at a time. But in this case my impatience got the best of me.
#3: The Impulse Buy
In early January I got a call from a friend. She was heading for the Australian Open in a few weeks and she had an extra ticket. She was calling to see if I wanted to go. Heck yeah I wanted to go! This was the Australian Open! So without giving it too much thought, I said yes.
Of course, I hadn’t planned for this trip. At all. I hadn’t saved for it. I hadn’t carved the time out of my schedule. And it was only a few weeks away. This was a last-second, impulse decision to the extreme.
Now, I had an amazing time and don’t regret a single thing. But money was tighter in the months surrounding the trip and everything was just a little more stressful. In an ideal world I would have planned for this kind of trip months ahead of time. Sometimes life happens and the planning happens in hindsight.
The Moral of the Story
There’s this perception around personal finance that you’re supposed to plan for everything ahead of time and make perfectly rational decisions in every situation. And to some extent thatis the goal. But it’s unreasonable to think that you’ll be able to do that 100% of the time.
We’re all human and we all do things imperfectly. When that happens, cut yourself some slack and move on to the next decision so that you are reasonably on track.
On my blog, one of the topics I like to cover is explaining how the personal financial advice industry works. Most people get financial advice from someone who is a salesman of insurance, annuities, mutual funds, and other products. You can also get help from someone whose main profession is something related like a CPA or lawyer who offer advice as a side business. The best way to get advice however, is from someone who functions as a consultant.
There are financial advisors out there that charge by the hour for financial advice. They often call themselves financial planners to distinguish themselves from financial advisors. You can find these financial planners through industry associations like the Garrett Planning Network and NAPFA.org.
I say it’s best to work with a consultant style of advisor because the consultant works only for you. Ask yourself what someone’s motivation is. A financial advisor employed by an insurance company or investment company (like Merrill Lynch, Morgan Stanley, Fidelity, Vanguard, etc.) has sales managers above them making sure they sell a certain number of contracts every month. You don’t want to be one of those sales targets. It may work out for you, and there are representatives who do look out for their clients, but ask yourself what their motivation is before signing anything.
By hiring a financial planner that charges fees only and no commissions, you are going to get an advisor who puts your best interest ahead of their own. Ask the advisor to sign the fiduciary oath. Advisors out to meet sales performance targets won’t put their fiduciary duty in writing. By going with a consultant style of advisor, not only will you get sound financial advice, you won’t wonder if the advisor recommended a product because his sales manager told him to.
I’m usually pretty frugal. I’ll often do without something I want but don’t need, or I’ll find a cheaper alternative. It’s just my nature.
But just after the holidays, I decided to indulge. I bought a navy blue Brooks Brothers blazer I’ve had my eyes on for years, the kind of thing that never goes out of style and that I can wear in all kinds of situations.
As silly as it might sound, I’m really excited about it! It’s something I’ve wanted for a while and I can’t wait to wear it. But I’m also excited about the deal I got. Instead of paying the full $558.49 price tag, I was able to get it for $260.47.
Here’s how I saved the money, and how you could do the same on your next big purchase.
Step 1: I Waited
I didn’t buy the blazer as soon as I saw it. It probably sat on my wish list for a few years before I actually pulled the trigger. And that waiting did a couple of things for me.
First, it allowed me to find an opportunity to buy it for less. Instead of paying full price, I was able to get it for 50% off during the Brooks Brothers annual sale. That saved me $249 on the price of the blazer, and another $22.81 on sales tax.
Second, I benefited from delayed gratification. I got to spend a long time anticipating the purchase, which is actually a key part of enjoying something. And when I finally did buy it, it felt like a gift. I appreciated it more because I had been waiting for it.
Waiting helped me save money AND enjoy the experience more than if I had bought it immediately.
Step 2: I Looked for Alternative Savings Opportunities
With a little digging, I found that I could buy a $250 Brooks Brothers gift card for just $225. So I bought the gift card, used the card to buy the blazer, and saved myself another $25.
Whether it’s a gift card, a coupon code, or something else, it never hurts to look for alternative ways to save money before buying.
Step 3: I Used a Cash Back Credit Card
When I bought the gift card I used a credit card that earns 1% cash back, which saved me an extra $2.25. Certainly not a life-changing amount, but every little bit counts!
Step 4: I Bought Quality
This is a high-quality blazer I expect to use in many situations for many years to come.
When I spread the cost out over a number of years, it becomes a lot less expensive. Especially when compared to cheaper alternatives that might fall apart, or go out of style, a lot sooner.
Now let’s be clear: this was still NOT a frugal purchase. I spent a lot of money on something Iwanted, but didn’t really need.
But that’s okay from time to time. Nobody should feel like they always have to stick to the bare necessities or like they can never indulge.
I couldn’t make a purchase like this all of the time, but I’m happy to spend money on a high-quality product that I’ll use a lot and enjoy wearing, especially when I’m able to stack savings for a great deal.
From a low of 676 on March 9, 2009, the S&P 500 stands at 2,090 as of June 21, 2016. That’s a 209% increase over a period of just over 7 years.
And yet, things have been a little rocky so far this year.
The stock market dropped 9% from 1/1 to 1/20. It dropped another 6% from 2/1 to 2/11. And it fell 2% from 6/9 to 6/15.
We’re still near all-time highs, but is it possible that we’re at the top? Am I ready to predict the next stock market crash?
Of Course Not
I’m guessing you saw this coming, but no I’m not predicting the next big stock market crash.
The truth is that I have no idea what the stock market is going to do over the coming months, and neither does anyone else, no matter how loud they yell at you from the TV.
While the stock market is an incredibly powerful place to grow your money over the long term, it can be a roller coaster ride in the short term. Big upswings are followed by big downswings, leaving you to watch somewhat helplessly as your account values rise and fall.
And there’s just no way to know what’s going to happen next. We may very well be in for a big crash in the near future. Or we may not. But there are a few things to keep in mind no matter what.
Focus on the Long Term
Short-term drops on the stock market like we’ve experienced this year are the norm. 5% and even 10% drops are not uncommon.
Big crashes are also the norm. We experienced them in 2008, 2000, and many other times throughout history.
And through all of that, two things have held up:
- No one has been able to consistently predict these crashes ahead of time. And remember, if you want to profit, you not only have to get OUT at the right time, but get back IN at the right time as well. Otherwise you’ll miss the recovery.
- Over the long-term, the stock market has always gone up. Not every day, every month, or every year. But you have always been rewarded for keeping your money in the market over the long term.
What to Expect Going Forward
I can’t predict what the stock market is going to do, but I can give you two more things to keep in mind.
First, no matter what happens there will be plenty of ups and downs along the way. Expect that going in.
Second, investment advisor Rick Ferri, a man I admire greatly, foresees long-term stock market returns in the 7-8% range and bond returns in the 4-5% range. The exact outcome will almost certainly be different, but the point is that well-informed, reasoned experts still expect returns to be positive going forward.
By the Way…
Despite those scary stats at the beginning of this article, did you know that the US stock market has returned just over 3% for the year as of the time I’m writing this?