Your Money and Your Life, Part Two

This is the second part of my interview about financial literacy and responsibility with financial strategist Brian Bedford*.


Carlota Zimmerman: Why is it so important to save? What are the sort of things you hear from clients who are having trouble sticking to their budget? On average, how much savings should an adult have?


Brian Bedford: In the short-term, it is important to save so there is money available to take care of large expenses that come up infrequently. Notice: I didn’t call them “unexpected”. We know we will have car repairs, maintenance on our house, etc., we just don’t know exactly when they will happen or how much it will cost. To use the term “unexpected” makes it sound like we couldn’t have foreseen these things, effectively excusing the fact that we didn’t save for them.


In the long-term, many significant things we could hope to accomplish in life take money to make it happen. If we hope to retire, assist a child in going to college, start a business, or be charitable to those who are in need of financial resources, we need to have “extra” money beyond our regular income to do these things.


The amount of money a person should have for emergency savings will differ from person to person. If a person has a modest household budget, consistent income, and high job security, they might be able to get by with less. If person has an expensive lifestyle, volatile income, or low job security, they would want to have more money set aside. A common range to consider for emergency savings is three to six months’ worth of monthly household expenses. This will allow people to absorb larger costs that come up, as well as job transitions if need be.


CZ: How do you motivate clients to adhere to their self-defined financial choices, in order to reap the rewards?


BB: There can be a lot of moving parts in a house-hold budget, so it is important to simplify things as much as possible when budgeting. Also, because there can be many conflicting objectives, it is important to make a sequence of objectives to attack with the surplus in your budget. Once people see a clear and simplified plan, it is often a far less overwhelming undertaking than they had originally envisioned. It is also helpful for people to know why they want to get their finances in order. If a person doesn’t like their job, the thought of being trapped there because they can’t afford to retire might be painful enough to motivate them to action. On the positive side, having time and resources to travel or spend more time with family might be motivating. Ultimately people should find something motivating for a goal that moves them beyond feeling like they ought to be disciplined in their finances, and into a place where they have a strong desire to reach a goal.


CZ: When helping clients create a financial strategy, how do you get started? What’s your best advice for someone who is looking to make a plan on his/her own?


BB: I think it is helpful to think in terms of offense and defense. Like in sports, offense is about being proactive to accomplish your goals, and defense is about containing the damage being done to you. In finances, defense is admittedly not as fun as offense. However, if a person isn’t prepared to handle things that happen [in their life], they will not likely make much progress offensively on their goals either. So the place to start is on defensive things like emergency savings and necessary insurance products. Once we can absorb things that happen to us without much damage, we can use our surplus income to go on offense.


CZ: Is financial illiteracy truly as rampant in our society as it appears?


BB: There are some things that most people should know about, such as having savings and not accumulating too much debt. When it comes to retirement income planning, business succession strategies, and other complex goals, many people don’t have the knowledge or skill to go about it without help. Many people feel like they should be experts when it comes to finances, but realistically, most people have received little to no education or training on the matter. Without education or training on finances, why would anyone expect to be an expert?


CZ: Why does the average person have so much trouble saving?


BB: As a society, we tend to think that having nicer stuff as our income goes up gives us a “better” lifestyle. Many people will judge whether or not they are “doing well” in life by the type of home, car, and vacations they spend on. Modesty, like a budget, is commonly viewed as a punishment for low income. However, modesty can be proof of self-control, which is a positive character trait necessary to achieve many goals from weight loss to financial goals. Many people who choose to look like they are wealthy will never actually become wealthy, and many people who are wealthy are so largely because they don’t spend like they are.


*Full disclosure: When I pitched this piece to Brian, I made it clear that I would not pay him, nor would I hire him to help me with my own financial planning. In fact, given the rules of Brian’s industry, if I had tried to do so, he would have been forced to immediately stop talking with me.

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