The Financial Fulcrum

Source: Image by Arek Socha from Pixabay

Fulcrum [fo͝olkrəm]: the point on which a lever rests or is supported and on which it pivots; a thing that plays a central or essential role in an activity, event, or situation.

Your financial life is something like a fulcrum. All of your spending, saving, and investing decisions pivot upon a “thing”—i.e. your life situation—that plays the central role in all that you do.

Whether you are fabulously wealthy or living a modest lifestyle, your well-being depends a lot on how you rev up that lever that your financial fulcrum supports. Sometimes you might shift it up as if your life is one big Grand Prix race, but most of us, most of the time, have to know when to modify or refrain.

This is even more important when you are retired and no longer receiving a paycheck to resupply the capital you’ve accumulated. Before you get to that point, you should take stock of how your financial fulcrum will affect your activities.

The first and most important step is to know where you are in terms of your accumulated wealth, sources of income (such as a pension, Social Security, part-time work) and your fixed and uncontrollable outflows (such as mortgage, taxes, utilities, food, insurance. ).

Then you need to be comfortable with additional data points, such as how your wealth is invested and how much risk is associated with the asset positioning.

For example, your portfolio might be invested in individual stocks and bonds, mutual funds, ETFs, wrap accounts, real estate, precious metals, cash and equivalents. Each investment carries with it cost and risk. You need to know whether there is appropriate symmetry between the risk and return factors and your actual needs.

The financial fulcrum also plays a central role in events that are beyond your control. Think uninsured disasters, medical costs beyond what your insurance covers, death of a spouse, divorce, unexpected losses, unexpected needs of grown children. Not to mention macroeconomic changes such as market downturns and recessions.

Along with the impact of these events is your ability to deal with them as rationally and effectively as possible.

As life unfolds, you have to continuously make sound decisions that fit the circumstances. No, you need not have an MBA in finance or be a Certified Financial Planner to make smart decisions. But you do need to know enough to understand how life events and your financial decisions will impact the success of your financial life.

Here are some basic essentials that should go into your financial fulcrum:

1. A written financial plan that covers multiple scenarios, possibilities, and likelihoods. Operating without a written plan that outlines, explains, and provides guidance on reaching your goals is like being dropped into the wilderness without a compass, map, and supplies. It’s vitally important that your plan clearly reflects your needs, values and vision for your future.
2. A keen understanding of the risks that could affect your plans for the future. Risk is a funny thing. When it comes to the stock market, many people have an “unlimited” risk tolerance when markets are going up and zero tolerance when markets are tumbling. But there are other risks to factor into your planning, such as the impact of unexpected events, health changes, family upheaval, or uninsured expenses.
3. A real Plan B. You need to consider what will be acceptable to you if your Plan A goes awry. This could be due to medical limitations or unforeseen difficulties that alter your ability to live according to your originally conceived plan.
4. An understanding of your financial decision-making process. We make a lot of decisions based on various factors, such as our money history (how we grew up around money), social influences (we want to keep pace with our friends), our definition of needs and wants. In other words, your beliefs, behaviors, and habits are created by your money mindset, which is developed in childhood.
5. Objectivity. It’s really hard for the human species to see things outside of our own belief system. Getting objective advice is important. Just make sure it’s truly objective. For example, if you need insurance, seeking advice from someone who sells insurance could lead to advice that is tilted in favor of the commission they stand to earn.

Living a fulfilling and satisfying life can rest on the financial decisions you make. The wrong decisions or lack of any decisions can tilt your chances of success. Arm yourself with the right support, guidance, and understanding before moving forward. Don’t allow your knee-jerk or emotional reactions to lead you into a disaster zone.