Financial advice comes in all directions, and when you add it up, it can be confusing as hell. Apparently, we’re supposed to have it all: A fat nest egg of savings; a diverse portfolio of stocks, bonds and other investment vehicles; and a nice piece of real estate to call your own. That all sounds great in theory, but in reality, do you actually know anyone like that? For most people, that’s a big, exhausted no.
At the end of the day, then, what does it really mean to be “financially secure”? Is it owning assets? Having investments? Just how big of a role does your humble savings account play in this? Alongside Brian Walsh, a certified financial planner for SoFi, a personal finance company, we’re stockpiling some answers.
So, cash. How important is it versus “good debt” and investments?
First of all, Walsh says having cash/savings is absolutely critical for a couple different reasons. The first is obvious: When you have a cash safety net, you can weather unexpected circumstances without going into debt — or selling off your investments at a loss, or whatever your own personal worst-case scenario might be.
The other reason is much less talked about, but just as important.
Go on…
The other reason savings are critical is the emotional side of things. “So many times, financial planners look at [only] the finances,” Walsh says. “The numbers are important, but human behavior is arguably more important, and when you look at research, one of the key aspects that influences people’s satisfaction, or how much anxiety they feel with their finances, is having enough cash on hand to cover an unexpected expense.”
In other words, a healthy savings account will improve the quality of your life simply through the reassurance it provides. Considering many American families are currently unable to cope with a surprise bill for $400, that’s not so surprising.
What about financial security right now, though, in a coronavirus panic where everyone’s world is either already turned upside-down, or they’re living on the edge of uncertainty?
There are three important aspects that Walsh concentrates on with people: 1) Making sure they have enough cash on hand to cover an emergency; 2) making sure their debt situation is under control; and 3) making sure they’re protecting their income in case anything happens to them (or their income).
For emergency cash on hand, a bare minimum of one month’s expenses is essential, but three to six months is ideal — a lot depends on whether your household is single or dual income, and how volatile your job is. Again, the fact that this seemingly simple advice is so wildly out of reach for so many people says a lot about how badly our society is malfunctioning.
Debt can be okay, but remember, there’s good debt and bad. Walsh defines “bad debt” as any debt with an interest rate over 7 percent, and he says it’s important to get rid of that debt ASAP. Credit card debt is the platonic ideal of “bad debt”: You don’t want to live your life with that hanging around your neck. For comparison, “good debt” includes things like mortgages, car loans or student loans (don’t you feel better knowing that particular albatross is “good”?).
As far as income protection goes, Walsh is talking about disability insurance or life insurance — the safety-net stuff, the kind of coverage you only need if the worst happens (but the stuff you really, really need). That, in a nutshell, is the foundation of financial security.
What about investing?
“We get this question a lot,” Walsh says. “We focus on having that financial foundation in place before we really start going down the path of, how do I invest and how do I develop that investment strategy.”
Makes sense, right? You want to get yourself covered before you start putting your money out there, exposed to at least some risk. Here’s a big caveat, though: If your job offers some kind of employer match like a 401(k) plan, sign up for that, like, yesterday. That’s free money! And it’s one of the first things you should do.
Okay, so what order does all of this go in? And where do savings fit in?
Beyond employer-matching funds, forget about investing for the moment. Remember the basics: Have an emergency fund, and pay off your bad debt as soon as possible. Once you have those things, not only will you be a much happier person, you’ll also be in the perfect position to start investing more aggressively for the future without having to look over your shoulder all the time.
It’s important not to skip these steps because in times like now, with COVID-19 wreaking havoc on everyone’s lives and financial wellbeing, people may be forced to make a decision if they lose their job or their income plummets. Without that foundation, “How do they cover that?” Walsh says. “Do they rely on debt, or do they sell off their investments when they’re down by 25 percent?”
That’s a rotten choice. But those who have some savings on hand and their debt under control have the luxury of choosing the “none of the above” option.
So savings are crucial, basically?
Yep. As to where savings fit in: It fits in at the start! It’s not just the cornerstone, it’s the goddamn foundation of being — and, just as importantly, feeling — financially secure.
Adam Elder
Adam Elder is a writer in San Diego. He's also written for Esquire and WIRED magazines, VICE, The New York Times, The Wall Street Journal, The Guardian, newyorker.com and elsewhere.
