Do you remember participating in fire drills when you were a child at school? I certainly do. The bell would ring, the teacher would ask everyone to calmly stand up, and everyone would line up at the door. You would walk down the hallway with your class, perhaps grateful for the break in the monotonous school day. Everyone would stand around outside for a while, waiting, until the principal sounded the “all clear” and everyone went back in and went on with the day.
The beautiful thing about fire drills was, with a little foresight and practice, they took what could have been a terrifying situation (a fire inside the school) and turned it into a predictable routine. Rather than running around terrified, you had a plan that would lead you to safety, efficiently and effectively. You knew what to do, and that took the scariness out of the situation.
You can do the same thing for your finances. Let me show you how, in 3 key areas:
Cash Security
The “fire” = your income source disappears, and you fear not being able to pay your bills
The “drill” = having an emergency fund
Making it a habit to put money regularly into an emergency savings account buys you peace of mind – literally and figuratively! It buys you literal peace of mind with dollars put away for your future, and it buys you figurative peace of mind knowing that these dollars are building up a wall of safety around you. Dave Ramsey likes to refer to the emergency fund as a wall between you and Murphy’s Law.
The rule of thumb is to have 3-6 months’ worth of expenses stashed away in cash for a rainy day. My advice is to keep this quite simple: don’t mix your emergency funds with other types of accounts. Don’t try to find the perfect investment to make your emergency savings grow faster. Remember that the point of this account is not to grow money. It is to build a barrier, a safety blanket, if you will. You might rarely need to access this money. But when and if you do, it will be there. And you know that’s where to go first.
The result = cash flow is less scary when you can see your emergency savings account and KNOW how many months you can survive on that money, even with no other income.
Insurance
The “fire” = experiencing a dramatic physical event (house broken into, car wreck, medical emergency)
The “drill” = having an insurance inventory
You may or may not have several insurance policies at this point in your life. Maybe health insurance through your employer. Maybe life insurance through an insurance agent. Maybe AD&D through your credit union. Maybe you’re not even sure what you have! But the main point of any insurance is, do you know who to contact if you have to use it? Having an insurance inventory is another peace of mind tool that is simple and brings incredible clarity to your financial life. And with clarity comes calm.
If you don’t have an insurance inventory, it can be as simple as opening a document in Word or Excel and creating a list of your policies with the insurance company name and contact number. Or it can be more detailed, listing the type of insurance and notes on what it actually covers. (We have an insurance inventory template which I use with clients; if you would like a free copy, please send me an email and I’ll send it to you.)
If you do already have a list or inventory, but it’s been a while since you’ve reviewed your coverage with a knowledgeable professional, maybe it’s time to pick up the phone and schedule a check-up. You might be surprised to discover that you are underinsured or over insured – or maybe, like Goldilocks, “just right.” In any case, having that knowledge of where you stand with your insurance coverage can go a long way towards your sense of security.
The result = unexpected calamities can be less scary when you know where to turn in an emergency.
Investing
The “fire” = a stock market crash resulting in a significant financial loss
The “drill” = having an investment strategy and/or manager that you trust
There are all kinds of investing philosophies and approaches out there. I’m going to share with you what ours is, and why.
At Shadowridge, we manage investments with an active management mindset. In the current environment, that means we’ve been practicing fire drills for quite some time! While the stock market is going crazy and alarm bells are ringing for many investors, we paid attention back when the fire alarm started sounding months ago, and we proceeded to the exits in an orderly fashion. Now we are outside in safety (i.e., mostly cash), calmly waiting, while other investors who stayed in the burning building too long are finally running outside with their hair on fire. Our clients don’t have to get caught up in stock market drama. We’ve seen it coming, we have a plan, and we know what to do.
If you don’t know what your strategy is; or if you thought you did, but now it’s not working; or if you feel you need to change your strategy due to changes in your financial situation; consider talking to an active manager (like Shadowridge) about what else you can do to be successful. I’m not saying that active management is a panacea. I am saying it is worth considering, and seeing if it’s right for you.
The result = investing becomes less scary when you understand and have confidence in your investment strategy and/or investment managers.
The next time you are nervous about a potential fire in your financial house, remember what it felt like to go through a school fire drill. Chances are, it probably wasn’t that scary at all. What can you do right now to set yourself up for “fire drills” so you can feel less uncertain about what the future may bring?
If you or someone you care about are unsure about any of these topics and want guidance, let’s talk!
When you know what to do, it can take the scariness out of the situation. It can help build your mental and financial resilience. It can help you to relax.
I’m happy to help.
