Financial Independence – Park Your Money in the Right Places
Over the past two days, I have been talking about Financial Independence for Baby Boomers.
First, I discussed the vital step of DSATM (Don’t Spend all the Money) so you can have enough to invest, and
Then, I talked about why you need to Start a business to generate income, to keep more of your money and grow your wealth.
Step Three: Park Your Money in the Right Places
This is the trickiest part, as we’ve seen from the current financial debacle. You need to find a place to park your money so it will grow at a reasonable rate with a reasonable level of safety.
The Risk/Reward Pyramid. I learned about the Risk/Reward or Risk/Return Pyramid many years ago. Here is the principle behind the pyramid: The higher the risk, the higher the return. And vice versa. There is no getting around the pyramid. This basic financial concept is as inviolable as the assertion about death and taxes, and it is the concept that the people who lost everything in the 2008 stock market crash forgot. People who tell you, “I can double your money (give you a high return) …guaranteed.” (low risk) are telling you B#K@S#$!. Is that plain enough for you? It simply can’t be done.
No Guarantees. Last year, I interviewed Bill Losey, retirement strategist. His mantra, which I can’t forget: I can’t guarantee squat! As we have seen over the past few months, he was right. No one can guarantee you anything. But you have a greater chance to get your money back at the lower end of the risk/return pyramid. And, of course, that means lower returns.
Create a Ladder of Investments. Start out buying the most fundamental stuff, like CD’s, and, depending on your stomach for risk, up as far as you are comfortable. For many of us Baby Boomers, it’s probably smart to stop with mutual funds; we just don’t have as much time to wait out the ups-and-downs of the market with riskier investments like commodities. Even within the universe of mutual funds, there are more or less risky funds. A bond fund that only invests in companies in the Dow Jones Industrial Average (the top 30 companies in the U.S.) is less risky than “junk” bonds that invest in start-ups. You can create a ladder containing just CD’s or individual bonds, too. Whatever you want to do is OK, as long as you remember the risk/return pyramid.
Getting Help With Financial Decisions. You may be wondering if you should trust me (no, I can’t guarantee squat!) or if you should find a financial advisor you can trust. You can do that, or you can do it yourself. Bill Losey gave us some tips for doing your own financial planning last July. You might want to re-read his post for more information.
And, yes, having a business is right up there at the top of the pyramid as a risky venture. But, remember, you are also creating that business to follow your passion and deduct expenses to lower your taxes.
One final note: I’m not a financial planner, investment advisor, nor am I Jim Cramer in disguise. I’m just giving you my humble opinion.
One last question: Now that you have stopped spending all the money, saved on your taxes with a small, fun business, and invested wisely … What are you going to do with all this money?