Exercise Your Financial Muscles to Get Financially Fit

February Client Letter: Exercise Your Financial Muscles to Get Financially Fit

“Those who work their land will have abundant food, but those who chase fantasies have no sense.” This ancient advice from Proverbs illustrates the importance of financial fitness.

What is financial fitness? Well, we are all familiar with the term physical fitness. If pressed for a definition, we might define it in terms of our own ideas and circumstances.

When it comes to an explanation of financial fitness, the same applies. A lot may simply depend on the season you are in. Financial fitness might mean something different to someone who is single versus a couple with young kids, an empty-nester or a retiree.

Even within those demographics, one’s perception could be colored by personal circumstances. Are you saddled with debt, living debt-free, renting or are you a homeowner?

There are many ways to get ahold of your finances; you can increase earnings, lower spending, start saving more (short-term and longer-term) and implement debt management. For many, earnings are difficult to influence in the short-term. For most, tackling the spending side of the equation will yield the quickest results. Below we consider six principles that will help you get into financially fit shape wherever you find yourself in life.

6 principles for financial fitness

“An investment in knowledge pays the best interest.”—Benjamin Franklin

1. Set goals. If you don’t have concrete financial goals, both shorter term and longer term, reaching some kind of level of financial fitness becomes much more problematic. Simply put, you don’t have a destination. You are financially adrift. As George Harrison has noted, “If you don’t know where you’re going, any road will take you there.”

Short-term goals you might consider: Establishing three to six months of cash in an emergency fund, saving for a down payment on a home or auto, or saving for a vacation. Long-term goals: college savings for your kids and saving for retirement.

We listed on our website that research shows that if you work with someone that holds you accountable your chance of success increases by up to 95%.

We have some great tools that will show you where you are on your journey. Are you on course and if not, what it will take to get you on course? Seeing these details visually is a powerful way to make your goals come to life in your mind. If you want to see what that looks like please reach out to us.

2. Do you know what ‘buckets’ your income lands in? What I mean is how much of your money is taxed now, taxed later and taxed never. How do you spend your income? If you aren’t tracking expenditures, you won’t have a holistic picture.

You might be surprised at how much you spend on eating out, on entertainment, and even on the daily habit of barista-prepared lattes. Unnecessary spending can be diverted into savings or paying off debt, especially high-rate credit cards. Make timely payments. This will not only prevent you from accruing needless fees, but it will raise your credit score.

Once credit cards are paid off, channel the excess funds into savings. When you accomplish shorter-term goals, reward yourself. It need not be extravagant, but accomplishments should be celebrated.

Finally, you will struggle to follow a plan that is too draconian. Trim frivolous spending but leave some room for fun and hobbies.

3. Your lifestyle shouldn’t exceed your income. If it does, you are burning through savings or taking on debt, and your stress level will reflect it.

Excessive spending is not a path that leads to financial fitness. You want financial space in your life. You want ‘money at the end of the month,’ not ‘month at the end of your money.’ A budget is your blueprint that helps achieve this goal.

Many of you have heard me describe a more simplistic way to budget. Only leave the amount in your checking account that you believe you spend each month. Move any excess into a savings account. Check your balance from time to time and determine if you will need to move any money over from your savings account. If you do, make a note of it. After several months you will quickly learn what your true monthly expenses really are.

4. Invest wisely. Among various factors, your financial goals, both shorter and longer term, will greatly influence the proper mix of investments. A diversified portfolio that crosses the spectrum can reduce risk and enhance your return over the long run.

“Don't look for the needle in the haystack. Just buy the haystack!” advises John Bogle, founder of Vanguard. In other words, diversify!

We are here to assist you with that. Our recommendations are tailored to your financial goals and your unique circumstances.

We avoid get-rich-quick schemes, which are usually nothing more than schemes minus the riches. Accumulation of wealth over a longer period is our goal. We believe it should be yours, too.

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” says Paul Samuelson, the first American to win the Nobel prize in economics.

5. Enjoy your retirement. Many enter retirement after accumulating wealth over decades. They have learned how to save. For some, suddenly relying on that savings rather than earning income from labor seems like a daunting leap, one they may be ill-prepared to make. It doesn’t have to be that way.

While your tolerance for risk (losing money) may change, we might recommend that you build a portfolio that allows for a degree of growth. If need to stay ahead of inflation and that has become a challenge in the last year.

These are broad-based guidelines and will differ from person to person, but it’s an outline that arms you with knowledge and enhances your financial fitness.
Here’s another lesson from Proverbs: “Take a lesson from the ants. Learn from their ways and become wise! Though they have no ruler to make them work, they labor hard all summer, gathering food for the winter.”

One of my many sayings is, “Without A Plan You Don’t Know If You Can” and that is definitely true when it comes to retirement. The question that everyone struggles with is not how much do I need to save but how much income will what I saved provide me every month for the rest of my life. You’ve got to have a plan to answer that critical question. Nothing is more important than having crystal clear clarity around your monthly income during your retirement years.

6. Protect your assets. Do you have life insurance, health insurance, and personal liability insurance? Do you have a will and estate plan? Who are your beneficiaries? What happens if you become disabled? Do you have a trusted advisor to handle your affairs?

If you own your home without a mortgage, do you have homeowners’ insurance? Surprise, not all do. If you rent, renters’ insurance is cheap. It’s a must-have item.

Absorbing the fundamentals—the foundation for success

Those who fail to put sound principles into practice are like those who build their homes on sand. The rains come and the winds blow, and financial misfortune overtakes them.

Wisdom encourages us to build our homes on a solid financial foundation. Though the rains come and the winds blow (and they will), the house and foundation are designed to withstand financial storms.

Every situation is unique. You may have mastered the fundamentals, and only need to apply the principles we highlighted selectively, plugging small holes and shoring up your finances. Or a more aggressive approach might be in order. Focus on one theme at a time. It could be cash flow, risk management, investments or estate planning.

Having said all that, we never want to give the impression that you are all alone on a financial lifeboat. We are always here to assist.

A cautious, upbeat start to 2023

There was no shortage of gloom as the new year began. The Federal Reserve was signaling higher interest rates, and its aggressive campaign, started last year, to rein in inflation has been threatening to throw the economy into a profit-killing recession.

While investor sentiment is far from euphoric right now, 2023 is off to a strong start.

What’s behind the move?

Table 1: Key Index Returns

Source: Wall Street Journal, MSCI.com, Bloomberg
MTD/YTD returns: December 30, 2022-January 31, 2023
**in US dollars

Last year, the Fed hiked its key lending rate, the fed funds rate, by 75 basis points (bp, 1 bp – 0.01%) in four consecutive moves.

Mix in a 50 bp increase in December and 25 bp increase back in March, and we experienced the most aggressive tightening cycle in over 40 years—1,000 bp in 6 months (St. Louis Federal Reserve) at the end of 1980. Ronald Reagan had not yet been inaugurated.

While the Federal Reserve is not yet signaling a halt to rate hikes and commentary suggests it could hold rates at a high plateau this year (what analysts have been calling ‘higher for longer’), the pace of rate increases is set to slow from last year’s nearly unprecedented level. This week the rate increase was 25 bp as expected. The market jumped as a result, which further illustrates how the market is driven more by news than real data. Which leads to this question.

Are investors front-running the Fed? Or are they too optimistic about rates? Fed officials pushed back aggressively last year on a 2022 pivot.

Today, investors believe we may see at least one rate cut by the end of the year. I don’t see that happening based on the current economic data. Previously, that had not been in the Fed’s game plan, but Fed Chief Powell seemed less wedded to pushing rates above 5% at the February 1 press conference.

While Powell isn’t declaring victory on inflation and he isn’t ready to hint at a turnaround, he was more open to the recent moderation in inflation. The initial reaction was positive.

Looking ahead, a significant rise in the jobless rate would probably force the Fed to cut rates, but a drop in corporate profits could negate any benefits from falling rates.

We learned today that the US economy added 517,000 jobs in January which was shocking which you consider the experts had predicted 188,000 new jobs. The unemployment rate fell to 3.4%, which is the lowest it has been since May 1969. The Federal Reserve has raised interest rates by 450 basis points, or 4.5%, since last March in an effort to slow down the economy and reduce the high levels of inflation we are experiencing. Despite the increases in interest rates the labor market remains incredibly strong.

How the Fed responds will be heavily influenced by how the economic outlook unfolds.

An opaque crystal balls.

From 1970 through 2021, the January return on the S&P 500 Index exceeded 5% 10 times (St. Louis Federal Reserve data). Excluding reinvested dividends, the S&P 500 finished the year higher nine times. The 90% ‘win ratio’ beats the average since 1970 of 74%.

We have exceeded a 5% return in the S&P 500 in January 2023.

During the 10 years when January advanced by 5% or more, the S&P 500 averaged a return of 21.5%. Its best annual return was 31.6% in 1975, which followed the difficult 1973-74 bear market. Its only loss was 6.2% in 2018.

There are those who attempt to glean insights from expected market returns based on where we are in a political cycle. Such exercises are interesting, but let’s stress that each economic cycle has its own peculiarities that may override these barometers.

We know that past performance is not a guarantee of future results. Ultimately, the economic fundamentals will play a big role as the year unfolds. However, as we have seen in the last few years, the market is far more influenced by news than ever before and I expect that trend to continue well into the future.

I trust you’ve found this review to be educational and helpful.

If you have any questions or would like to discuss any matters, please feel free to give me or Shannon a call.

Also please feel free to send this newsletter to anyone you believe would receive value from it.

As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.

Kind Regards,

Niles P. Geary, II, MBA, CRPC, AIF™
Co-Founder & CEO

Niles P. Geary, II is Registered Representative offering Securities and Advisory Services through UNITED PLANNERS FINANCIAL SERVICES, A Limited Partnership Member: FINRA, SIPC Voyage Partners Financial Strategies, LLC and United Planners are not affiliated.

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