How to set yourself up for success.

The fundamental aspect of financial planning for emergency and opportunity.

Last week I spoke with a journalist from CNBC regarding financial stress levels in young adults. Surprisingly, 61% of young adults feel stressed when it comes to their money. Check out the article here!

This is unfortunate and it is really tough to gain some financial comfort without a clear plan in place.

So… how do we set ourselves up for success and mitigate our financial stress? Very simple, I’ve covered it a few times thus far but it’s hard to emphasize how important it is - you build a cash reserve.

We say “cash reserve” and not “emergency fund” because emergency funds have this negative connotation. Almost as if it is enticing an emergency to come your way.

Cash reserve, however, is a lump of cash that can be used for emergencies and opportunities.

“That’s great, Cliff. Thanks for letting me know that a lot of my stress will be alleviated with a pile of cash. I think that’d help nearly anyone.”

I get it. Being told to have a cash reserve is a lot easier than actually building one.

So, we need to know how to build a cash reserve.

As I explained to CNBC, rules of thumb for budgeting such as the 50/30/20 rule might be wayyy out of line with what is actually attainable for a young adult.

With sky-high rent and high costs of living, it might be completely out of reality to think that you can save 20% of your income on an annual basis.

That is fine. As an advisor I am much less concerned with your income today and much more interested in what you can do to increase your income, thus increasing your savings.

20% might be out of the picture. But there is likely some amount of money that can be saved on a monthly basis.

Try my favorite budgeting assistant, the waterline method. If that doesn’t work, get into the nitty gritty and map out the credit card statements.

You must have an idea of what your monthly cash flows look like in order to fully understand what can be saved.

On top of that, how would you ever know what your cash reserve target is without that understanding? We know our cash reserve should be a multiple of our monthly expenses, so that is table stakes when we look to build our reserves.

If you find yourself stressing about your finances, I can assure you that putting them out of your mind will only compound your issues.

Start with your cash flows, understand your monthly expenses, and work to build a cash reserve that allows you to feel comfortable if any unexpected expenses arise.

From there it will get a bit more fun. Then we can talk about investing, but only when you’ve earned the right to invest.