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  • Tyler Weerden

A.R.M.O.R. – 5-Steps to a Solid Financial Foundation

Updated: Jun 5


In both law enforcement and finance, the basics matter. Some people tend to get lost in the weeds, obsessing over the “icing on the cake” factors. We all know that person more concerned with their new optic, bipod, and suppressor versus learning the basic fundamentals of marksmanship. This also happens with finance. Stressing over which stock to day trade or what sector ETF to buy are things to ponder after getting the basics right. This month I want to talk about why you need to put on your financial A.R.M.O.R., before worrying about more complex concepts.


~Awareness~

Imagine you’re on a road trip and wake-up after a nap in the backseat. The driver asks you, “Should we take the next left?” There’s no way to answer that question without knowing where you are and where you’re going. You can’t pick a stock/bond mix or decide on traditional vs. Roth without knowing where you are and where you want to end up. The first step is being aware of your goals, values and time. Should you invest or pay down debt? Do you want to donate to charity? Is it time to buy a home? You first need to get clear on what you value and what your goals are. You then should match your spending, saving, and investing to those values and goals.


I want you to be hyper aware of time. It really is our biggest asset. The sooner you start working towards a financial goal, the easier it’ll be to accomplish. Develop a timeline for each goal and a time horizon for each investment.


Next, know your income and expenses. A note on expenses. People tend to unintentionally underestimate their expenses. Take a few months of your bank/credit card statements and actually list out every single expense on a piece of paper or spreadsheet. Don’t forget to account for non-monthly recurring expenses like 6-month insurance premiums, annual memberships, etc.


Finally, figure out your net worth. Here's a net worth calculator from the FDIC. List what you own (assets) and subtract what you owe (liabilities). Finally, know your interest rates. Are you carrying high interest debt? Should you refinance a loan? Could you be earning more interest with a different account? Self-awareness on both the math side and the values/goals side should be your financial operations base.

 

~Reserves~

This is your life preserver. Hopefully you never need it, but that’s no reason not to have it.


How much emergency fund do you need? It depends. Consider: (1) Single income or dual income household? (2) How quickly can you find another job that will provide the same income? (3) Are your expenses higher than your income? (4) Do you have other assets that can provide income? 3-6 months is the typical industry recommendation, but it’s a personal decision.


Where should you keep it? The emergency fund doesn’t exist to get stock-like returns, it’s there to provide security. My personal rule: if the money will absolutely be needed in 5-7 years, it shouldn’t be invested in stocks. 


Options for your emergency fund include a High Yield Savings Account (HYSA), a money market mutual fund, and possibly short term bonds. Here's a list of HYSAs from NerdWallet. My emergency fund currently sits in the Vanguard Federal Money Market Fund. Note: bonds sold before maturity and certain bond funds can decline in value. Bonds / bond funds may not be the best option for immediate emergency funds. I personally have opted to buy individual U.S. Treasury Bills ("T-Bills) with money that I know I'll need in the next 12-24 months. I'm also flexible on that timeline which is why I'm comfortable and able to hold the T-Bills to maturity. Most of them mature in 6-months or less. As they mature, I reinvest the money in a new Treasury Bill. Interest payments from U.S. Treasury bills are taxed federally as ordinary income, but are typically free from state/local tax.

 

~Mindset~

Optimistic. To invest in the stock market is to be an optimist. You’re betting that the companies you invest in will continue to innovate, grow, and produce profits, resulting in price appreciation and/or dividend payments. If you invest in government or corporate bonds, you’re expecting that those entities don’t go bankrupt. The negative, “doom and gloom” mindset is one for poor investors. Watching financial media all day, seeing the Armageddon-themed economic scenarios will lead to emotional buying/selling.


Skeptical & Realistic – you need to be optimistic while also being skeptical and realistic. If anyone tells you about an investment with absolutely “zero risk” that also will get you “a guaranteed 10% return", you need to run. Is it too good to be true? Risk and return are always correlated. Do your research or talk to a professional about what returns you should expect from certain assets.


Constantly learn – whenever I hear a great financial mind being interviewed, I’m amazed at how humble they are and how they always talk about what books they’re reading. Be the same way.

 

~Options~

Create them and be willing / able to take them. When working protection we plan multiple driving routes and have various emergency egress options on venue. You create options in your financial life by building layers of protection and creating various routes to success. Some examples of building layers of protection include having emergency reserves, purchasing adequate insurance, not being over leveraged, and being cautious with too good to be true financial products. You create different routes for success by diversifying your investments, in terms of both asset allocation and asset location.


Let’s say you have every single dollar to your name invested in stocks and the market drops 30%. Or even worse, you have a large portion of your net worth in a single stock, and that company happens to be the next Enron. Due to the record market bull run and "to the moon" hysteria, you didn't want to miss out on returns so you didn't save an emergency fund because savings accounts were only paying 1-2%. You figured if you really needed cash you would just sell some stocks. Right?


To pile on, you also didn't want to waste money on insurance or keeping up with home or car repairs, because, "it'll never happen to me." That same year you have an unexpected financial emergency (medical, car replacement, house repair, child illness, etc.) and you need cash immediately. Without emergency reserves, adequate insurance, and most importantly awareness, your options are limited. Do you sell the remaining stocks while they're down? Do you use credit cards? Do you borrow from friends and family? Do you really want to be making a choice between these bad options?


Creating a financial life with options provides a stress-free way to handle emergencies while also allowing you to take advantage of good opportunities when they arise. The other aspects of A.R.M.O.R. give you options. Awareness, reserves, proper mindset, and proper risk management create a life where you're agile and not trapped during life's twists and turns.

 

~Risk Management~

Everything we do is centered around risk. If you're a fire fighter, paramedic, police officer, soldier, federal agent...this should be second nature. What’s the probability of this happening, and if it does, what’s the impact? Diversifying (not having all your eggs in one basket) is a good way to mitigate risk when investing. When one thing zigs, we hope another zags. Diversification amongst our assets is not the only measure we should be taking.


Adequate insurance is a must. Each year you should do a personal insurance audit. Consider your health, auto, home, renters, personal liability, umbrella, disability, long-term care, and life insurance needs. Our employer's open season for health insurance is the perfect time to do an assessment of what you have, and what you need. Not everyone needs every type of insurance. Remember, insurance is not an investment, it’s a transfer of risk. Do your due diligence on any insurance product that boasts stock-like returns.


Estate planning – not a fun topic, but I would argue this should be #1 on your list. Designate your beneficiaries today! Having the proper beneficiary designations costs you nothing, and is extremely powerful. Did you know that a designated beneficiary form will almost always override a written will? Still have your ex-spouse listed as the beneficiary on that old 401(k)? Haven't added your youngest child to the beneficiary split amongst the other children? Get these done ASAP!


The following are foundational documents that you most likely need. Obviously, consult with an attorney in your state. (1) Will – where will your assets (that aren't assigned by way of title, ownership, or beneficiary form) go if you pass? Who will take care of your kids? What happens to your dog? (2) Advanced Directive/Living Will – what medical care do you want? (3) Durable Power of Attorney – gives someone the power to act on your behalf with various legal and financial matters. There are other documents that may be applicable such as a trust. It’s worth paying an attorney for a few hours of their time to get the right documents drafted. Don't be cheap on this one.


~Summary~

If I met someone today who was brand new to all things personal finance, A.R.M.O.R. would be my top priority. All of the more nuanced, complex, higher-level decisions become a lot easier when you've put on your financial armor. Would you take someone to serve a search warrant and teach them about tactics, the rules of evidence, and criminal procedure but not have them put on armor? Would you teach a new patrol cop about drug interdiction, traffic stops, and processing crime scenes before going over the critical importance of always wearing armor?


This is what I think about when I meet someone who doesn't know their monthly cash flow, shrugs-off having credit card debt, doesn't invest in tax-advantaged accounts, but wants to ask me for my opinion on their Robinhood penny stock or the P/E ratio of a new IPO. Their priorities are all wrong.


Now don't get me wrong. I'm not blaming or bashing this type of person, especially if they're just unaware. Most of us didn't have a personal finance class in school and the glitz and glam of "stonks" and social media day trading "geniuses" are everywhere. It's hard to hear through the noise. If you're reading this and thinking of someone you know, perhaps share this article and help them put their armor on.

 

About the Author

Tyler Weerden, CFE is a financial planner and the owner of Layered Financial, a Registered Investment Advisory firm. In addition to being a financial planner, Tyler is a full-time federal agent with 14 years of law enforcement experience on the local, state, and federal level. He has served in both domestic and overseas Foreign Service assignments. Tyler has experience with local, state, and federal pension systems, 457(b) Deferred Compensation, the federal Thrift Savings Plan (TSP), Individual Retirement Arrangements (IRAs), Health Savings Accounts (HSAs), and invests in rental real estate. He holds a Bachelor of Science degree, a Master of Science degree, passed the Series 65 exam, and is a Certified Fraud Examiner (CFE).

 

Disclaimer

Layered Financial is a Registered Investment Adviser registered with the State of Connecticut and Commonwealth of Virginia . Registration does not imply a certain level of skill or training. The views and opinions expressed are as of the date of publication and are subject to change. The content of this publication is for informational or educational purposes only. This content is not intended as individualized investment advice, or as tax, accounting, or legal advice. Nothing in this article should be seen as a recommendation or advertisement. Layered Financial and its Investment Advisor Representatives have no third-party affiliations and do not receive any commissions, fees, direct compensation, indirect compensation, or any benefit from any outside individuals or companies. Although we gather information from sources that we deem to be reliable, we cannot guarantee the accuracy, timeliness, or completeness of any information prepared by any unaffiliated third-party. When specific investments, types of investments, products, or companies are mentioned, such mention is not intended to be a recommendation or endorsement to buy or sell the specific investment, solicit the business, or use that product. The author of this publication may hold positions in investments or types of investments mentioned in articles. This information should not be relied upon as the sole factor in an investment-making decision. Readers are encouraged to consult with professional financial, accounting, tax, or legal advisers to address their specific needs and circumstances.

 

© 2024 Tyler Weerden. All rights reserved. This article may not be reproduced without express written consent from Tyler Weerden.

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