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Financial reserves needed to protect against catastrophes

11/14/13 | By Chip Gordy, MBA, CRPC

You probably don’t expect to attain great wealth in your lifetime. Simple financial security would do, if only you knew what that meant. It’s a dicey notion all right, but it does have a few characteristics you can get your arms around.

You need a steady source of income. This comes from your job, or your business if you’re self-employed, or investments if you’re fortunate and alert. Future income is the bedrock on which financial security is built.

You need financial reserves. You need protection against financial catastrophes.

Of course I’m talking about insurance. You need it in sufficient amounts to cover your life, your health, your ability to earn an income, your family and your possessions (i.e. at least seven times your annual take home earnings). Without insurance, even the best financial plans can be wiped out suddenly.

Also, you need to get further ahead each year. If you stand pat, even modest inflation will erode your financial reserves just as surely as if you were spending the money. To stay ahead of the cost of living, you have to be alert for opportunities to make your money grow. These things don’t come to you by accident. You have to go after them, and that means setting some goals.

You need to set priorities. The most important step toward financial security is to translate it into your own terms. What, exactly, are your personal financial goals? If you have trouble sorting them out, try classifying them as either wants or needs.

Go a step further and add long-term or short-term to the description. Now you have some useful categories you can apply to your priorities.

Suppose that you’re going to need a new vehicle soon. Saving the money for the down payment without borrowing or dipping into savings would be a short-term need. Let’s call it priority No. 1.

Longer-term needs, such as contributions to a retirement fund, become your second concern. A trip to Key West next winter is a short-term want; making it priority three. The new set of golf clubs, would get a four.

You could shift priorities around, of course, and use more numbers. Actual goals and their priorities will vary with your circumstances. The important thing is to give serious thought to your goals and try to anticipate the expenses coming up (cash flow needs), whether they’re close at hand or several years away.

Also, choose goals you can get excited about because that will make you more motivated to reach them. “Financial security” sounds good, but it’s hard to measure. Therefore, refine and define what it means to you. Something like, “The exact amount of money that I desire is $5 million net worth by Dec. 31, 2017” is very specific. Now that you’ve got goals you can put a future price on, that price can be translated into a savings and investment plan that you can start today. Put your goals in writing; it makes for a great motivational tool.

— Chip Gordy, MBA, CRPC is a Financial Advisor with Coastal Wealth Management, LLC, 10441 Racetrack Rd, Unit 1, Berlin, MD, 21811 and specializes in Wealth and Retirement Income Planning. He can be reached at 410-208-4545 or chip@coastalwealtmgmt.com. Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Coastal Wealth Management LLC & Cambridge are not affiliated.

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