OK, I admit it: I still occasionally draw on my early education. Sometimes, while sitting in the fast-food drive-thru, the old food pyramid guiltily works its way to the front of my consciousness. I'm sure most people my age still remember the diagram we all saw in health class -- grains, pasta, veggies, fruits and the good-for-you stuff at the bottom and the just-plain-good-tasting, not-good-for-you stuff at the top?
Believe it or not, that old food pyramid may provide a better framework for some financial wisdom.
Let's work our way up from the base to the top of the pyramid.
The Foundation (Bread, Cereal and Pasta Group)
How much time did you spend preparing, researching and evaluating your last car? Probably more than you've spent mapping out your financial future. When do you want to buy that first house? Pay for your child's education? What should you be saving for retirement? Your plan is the base of your financial pyramid and should tie all these dreams together with an action-oriented strategy. Everything that follows should build on that plan.
Protect Against "What-ifs" (Fruits and Vegetables Group)
While an apple a day keeps the doctor away, other tools keep you healthy on the financial front. The equivalent of at least three months' worth of expenses set aside in a savings account is an aspirational emergency fund. Don't have one? Start setting aside a little each paycheck for this purpose.
Next up, insurance. It's not a dirty word like you would have thought based on my young kids' reaction to the mention of brussels sprouts or peas. Life events -- a new baby, home, career, retirement, etc. -- should trigger a fresh look at your entire insurance package. If you haven't reviewed it all before, now is as good a time as any.
- Life insurance: Online calculators such as the ones on the Department of Veterans Affairs' website or lifehappens.org can help you determine whether you have the right amount of life insurance.
- Auto and homeowners insurance: With rate increases across the industry, now is a good time to assess your coverage and costs.
- Liability insurance: Included as part of your homeowner/renters and auto insurance or as a stand-alone umbrella policy, you should have enough to at least cover assets and future income.
- Medical insurance: This should be a major consideration during career transitions.
You'll also want to make sure you've got a legal plan in place in the event that you die or are unable to make decisions. Ensure that you have up-to-date wills, medical and financial durable powers of attorney, living wills and a letter of instruction. Again, these documents should change and be updated as you and your financial situation evolve. This is all good stuff. It may not taste great, but it's very good for you!
Harness What You've Got (Milk, Cheese, Meat and Fish Group)
As we move up the pyramid, your savings and investments are the "meat" of your plan to achieve your financial goals. Here are four fundamentals to incorporate into your investment plan:
- Diversification: Don't put all your eggs in one basket. A mix of various types of investments is at the heart of diversification.
- Risk tolerance: Risk means you could lose substantial sums at just the wrong time. Build your plan based on your own comfort zone.
- Time: Your timeframe should play a key role in how you save and invest. Next month's mortgage payment or next year's car down payment should never be in the stock market. For short-term horizon goals such as an emergency fund or next year's vacation, consider investments that are stable and liquid. When goals are further out, you can consider beginning to incorporate stocks, bonds and other investments that don't offer the same safety and stability.
- Taxes: Focus on building a tax-diversified portfolio. A mix of accounts that offer current tax benefits (e.g., Thrift Savings Plan contributions that reduce taxable income), future benefits (potential tax-free Roth withdrawals), and flexibility (no-strings-attached, non-retirement accounts) is ideal. This type of approach gives you options, regardless of what happens with taxes.
Use Sparingly (Fats, Oils and Sweets Group)
Those were the words that the old food pyramid recommended when it came to fats, oils and sweets. Those same words can be applied to anything that breaks your budget or throws you off track financially. Your watchwords should be, "Spend less than you earn, and save some to boot!"
Just like you monitor your food intake to stay healthy, your finances also deserve close attention. Goals may change, markets will change and your financial situation will require things to be updated and amended -- so make sure your plan is keeping pace.
There you have it, a framework for making sure you have your bases covered when it comes to your financial health. Who knew the food pyramid could provide such a good financial lesson?
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