An Uncertain Future Require Certain Precautions
Step Five: Rainy Day Fund: Six Months' Expenses (Proverbs 21:5)
Once you’ve set up your initial $2,000 savings fund and paid off your credit cards, it’s time to set aside additional reserves for a rainy day. We live in a highly mobile society with an economy that is constantly shifting based on changes in technology, the country’s demographics and consumer desires. It’s not like it was a few generations ago where you could expect to go to work for a large company, plan on staying there for forty years, and retire with your pension.
I recently spoke to a woman whose husband had been laid off twice in the last year. They had no savings and funded the shortfall with credit cards to the tune of $10,000. I want you to avoid this scenario. Setting aside six months of living expenses recognizes that there may be periods of transition or even illness that you’ll be confronted with. Let’s work to get ahead of the curve by setting up a reserve fund for such a situation. Hopefully you’ll never have to tap into it, but if you do, it’s a whole lot better than going into debt with your credit cards.
Step Six: Review Insurance and Estate Planning Needs (1 Timothy 5:8)
While most of the destinations follow in sequence (with a bit of crossover), this destination becomes especially important once children enter the picture. While there may be times when it makes sense to have life and disability insurance and estate plans in place before children arrive, it is imperative that husbands and wives make appropriate plans once they are blessed with children. As far as insurance goes, this should include life insurance policies on both spouses and a reasonable disability policy on the working spouse.
When it comes to estate planning, you’ll want to have plans in place that responsibly provide resources to your surviving spouse and children. It is especially important to provide for the guardianship of your children in the unlikely event that both parents die unexpectedly. By setting up a will or trust, you’ll accomplish these objectives.
Start Paying Cash
Step Seven: Save and Invest with a Purpose (Luke 14:28-30)
Wow — just think of it. By the time you have reached step six, your credit card debts are eliminated and you have six months' living expenses set aside. Now with the money you were using to accomplish these goals, you can start funding major purchases with cash on hand rather than financing them. This might include a down payment on a home if you don’t yet own one. It should also include setting money aside so you can pay cash for future automobiles and other big-ticket items. What a great feeling it will be to know that the next car you purchase is fully paid for the day you drive it away!
Your budget should now have room to start a more aggressive savings plan so you will have the resources you need to pay down the mortgage on your home faster, help with the cost of your children’s education and provide for your retirement years. Given the state of social security, you’ll want to take responsibility for the bulk of your retirement needs. While each plan will be unique based on personal circumstances, in general, I recommend setting aside 10-15% of your gross income for these purposes.
Step seven includes managing your savings and investments wisely. In general, you’ll want to diversify your investments so not all of your eggs are in one basket. You’ll also want to develop an investment portfolio that is appropriate for your stage in life. For example, in your younger and middle-age years, it will make sense to have a portfolio more oriented toward growth. Investing for growth also entails a higher degree of risk, but over long periods of time, growth investments have outperformed more conservative types of investments. As you approach retirement years, your strategy will probably favor a more conservative pool of investments, since you will be primarily interested in preserving the value of your assets, and in receiving regular income from them in order to supplement social security.
So there you have it. You’ve just been given a road-map to true financial freedom. Wouldn’t it be nice if you were just a passenger along for the ride and your chauffeur took care of getting you safely to your destination? I’m sorry to tell you this, but there are no free rides! It just so happens that you are the driver, and to get to your destination, you’ll have to take the wheel. Remember that this is a lifetime journey and your progress will be uneven. But by following the path of stewardship, you’ll find the peace and contentment that God wants for you.
It All Starts with a Plan
Charles Dickens once said, “Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” Isn’t that so true?
To succeed on your journey, it will be absolutely necessary for you to develop a spending plan for the resources God has entrusted to you. Have you noticed that money seems to have legs attached to it? If you don’t tell your money where to go, you’ll find it disappears quickly and you’ll wonder where it all went. Instead of you managing your money, your money will be managing you!
Your plan should honor God and your family by prioritizing spending in a manner consistent with godly principles. This spending plan is often called a budget or cash-flow plan. It is the tool that provides direction for your spending and gives you momentum to reach your desired destination.
Our pastor recently sent out as a Christmas gift to all families in the parish a wonderful book, The Christian Home, written by Rev. Celestine Strub, O.F.M., in 1934. The author talks about the importance of families keeping a budget in the following way:
The best way for parents to avoid excessive or ill-advised expenditures is to keep a family budget. Let them make a careful study of their resources and a classified list of their needs; e.g., housing, food, clothing, running expenses, improvement, and savings. Then let them fix a certain percentage of their income for each of these items of expense, and hold their disbursements strictly within the budget allowance, unless real necessity or charity require otherwise. Keeping a home and a family is just as much a business as running a store; so why should it not be kept on a business basis? Many couples have had their eyes opened by keeping an itemized account of disbursements. They found that they had been extravagant without realizing it. But if keeping tab on one’s expenses teaches economy, it should be done in every Christian home; for economy, supernaturalized, is nothing but the Christian virtue of moderation.
If keeping a home was just as much a business as running a store in 1934, it is certainly more so now with such things as variable rate mortgages, complex insurance and investment options, automatic teller machines, credit cards, and a tax system that’s nearly impossible to understand.
Phil Lenahan is Director of Finance at Catholic Answers and author of Catholic Answers’ Guide to Family Finances. If you have a question you would like Phil to address, contact him at plenahan@catholic.com.
