I must admit right off the bat, this week’s blog post is a bit of a copy-cat from a sermon I heard from my good friend and pastor, Bradley Williams, who is a pastor at Forum Christian Church. Bradley spoke about the importance of having guardrails in our spiritual lives to keep us safe. The same goes for our financial lives- we must have guardrails to protect us from financial disaster.
As an investor, my portfolio improved dramatically once I developed systems. In the beginning I didn’t know what I was doing and so investing was more of a guessing game than anything. I’m talking about both in my stock and real estate investing portfolios.
Through experience and education I have developed strategies for both types of investing. These systems not only provide me a framework for picking good investments, they also provide guidelines to keep me from losing too much money. For an example, I apply a margin of safety to buying both stocks and real estate. For stocks, I try to figure out the fair value and then I take anywhere from 25-50% off of that price and make that my target price. For example, if I believe a stock’s fair value is $100, I will try to wait to buy it when it dips down to $50-$75. It requires a lot of patience to do that, but it has really helped to protect me.
I also have a point where I will exit a losing position to keep from losing more money. It’s never fun to do, but you have to have stop-losses to protect yourself from losing all your capital. It’s often referred to as “risk management”, but I like to think of it as a guardrail for my money.
There are 5 guardrails that everyone needs to develop to protect themselves financially. Here they are:
- Insurance– Often neglected, but having proper protection is key. This includes auto, home, life, business, and health insurance. Think about it, you can have a lot of money in the bank, but you could lose it all to one disaster if you don’t have decent insurance.
- Budget– You must establish a monthly budget to keep yourself from spending more than you are earning. It’s hard to have money to invest if you don’t have any money left over at the end of the month.
- Tax Protection– I am thankful for police, firefighters, soldiers, and paved roads as much as anyone, and I am well aware that it takes tax revenue to pay for those things. However, I don’t want to have to pay more than my fair share and I want to protect myself from high taxes in retirement. Therefore I use the guardrails of a ROTH IRA to protect myself. I use other tax strategies besides just a ROTH, but that is one example. You need a good tax advisor to assist you in developing strategies for taxes!
- Inflation Protection– Experts say that inflation has averaged 3% historically. Simply put, the good and services that we buy will cost more in the future. In other words, ten dollars will buy less goods and services in the future than it will today. This is why you shouldn’t just stuff your money under a mattress. You need to have investments that far out-pace the rate of inflation. If you don’t, you will have less buying power in the future.
- Income Protection– In today’s world, technology such as artificial intelligence and automated machines are replacing jobs. We live in a global economy where things change fast. Companies get bought out, jobs move overseas, and some jobs get eliminated all together. I am a big proponent of having a secondary source of income, such as rental property, to protect yourself.
If you drift through life thinking that the government and social security will protect you in retirement, you could be majorly disappointed! You must develop these 5 guardrails early in life for them to work!