The start of a new year is a fantastic opportunity to sit down, set some goals and figure out just where the heck you are. And of course, where the heck you want to be. The opportunity to sit and look at each aspect of your life – holistically and individually – cannot be taken for granted.
This year our financial plan has shifted for several reasons. The main one being that every year, goals and plans should adapt to your current situation and the future situation around you. No plan can last 10 years without any modifications along the way. Just like one does not steer in a perfectly straight line when on a straight road. Instead, you end up making thousands of micro-adjustments every second. There’s a very cool MythBusters episode on this, so you know I am not talking nonsense!
The plan is not changing in the 180-degree type way, but more of a haircut type way. It’s still the same, but looks better, and can now go out in public. These changes are brought to us by a combination of COVID-19 (the inescapable) and the incredible mismanagement of almost everything by the New Zealand government. We’ve seen incredible inflation take place and it doesn’t look like it’ll slow down anytime soon.
Buzz words like hyper-inflation are being thrown around and we can expect nearly every country to experience some form of hyper-inflation this year. So, what do you do when it comes to inflation? The main thing is to get your money out of the bank. It’s a rather simple rule – money in the bank loses value. As they say in Game of Thrones – it is known.
To get around this, there is another simple rule – put your money into assets. Assests are things that grow in value over time. Good assets end up earning you more money on your already invested money.
Another thing to think about – increasing your debt ceiling. Wait, you mean like go into more debt? Yeah, kinda… After all, the more inflation rises, the less real-world money you must pay. If $2 buys you $1 worth, your debt amount doesn’t magically double. It stays the same… Things are a bit more complicated than that, but this is a very high-level overview to illustrate my point.
This year, our money plan is simple – using three bank accounts to stagger our liquid money, while putting the rest into both automated investing – via Milford, and manual investing – via my Direct Brokering account. Let’s break that down to see what it means in practical terms. Our accounts are Everyday, Bills and Savings.
Our Everyday account is where our salaries get paid onto. The rule here is simple: money in, money out. This account should only ever have enough to cover impulse expenses, such as buying take out, going to the beach, and daily living costs. You know the ones. A chai here; a cookie there.
Our Bills account is where all our bills get paid out from. This allows easy budgeting – just look at all the outgoings and you have a very good idea of your expenses. We’ve also made sure that this account can cover 3 months of bills, should anything happen to the money flow.
Our Savings account only has enough to cover 6 months of bills and expenses. Nothing more, nothing less. It’s the break glass in case of emergency account. It’s the here-is-a-big-surprise-expense account. And as the money gets used, it gets topped up.
All the rest, well that goes into investments. Into assets that will buy more assets. Mainly shares, maybe some crypto. And possibly more into our home loans at some point. Money in these investments are accessible after a week’s notice, so, while not impossible to get out, it definitely creates a lag time. Think of it like freezing your credit card in a block of ice.
Looking at it, you can see we have built a waterfall effect. Should money stop coming in for whatever reason, we have a potential nine months of expenses covered. More than enough time to get hold of the money in our investment accounts. And more than enough time to (probably) recover or fix what was causing money to stop coming in.
This waterfall effect is how we’re dealing with inflation. By keeping as little as possible in the bank, while still making sure we can cover any emergency. Now, your risk tolerance may be higher than mine and you can live with only 3 months in bills and 3 months in savings. Or your risk tolerance may be low, and you’d prefer to have at least 12 months in your savings. It’s all up to you and how adverse to risk you are.
The one thing you can’t be ignorant to is inflation – the silent killer of savings. Money in the bank loses value every day, no matter who says what. It’s much better to give every dollar a job.
And that’s exactly what we’ve done.
And now I must put this in for the legal reasons…
I am not a financial advisor. All advice is taken with this in mind. I do not benefit from you using the same platform I do, or by using a different one. I do not have any insider knowledge of any company listed. Everything I will talk about – from the tools to the news – will be as available to me as it is to you. Again: I am not a financial advisor and never will be.
