What They Never Put In the Financial Marketing Materials

Lately, I have had a lot of questions from people who are feeling ready to do something with their finances. Sometimes it's a matter of making your way out of a difficult financial situation (recovering from illness or unemployment, finishing a degree, paying off a debt, etc...), but often it's just a sense that you've been just wandering along without any particular plan or purpose. Thanks to a flood of shiny ad campaigns from the big brokerage houses, people often think this boils down to opening a retirement account somewhere. Here is what I tell people to think about before you go shoving all your money into an IRA.

Retirement Accounts are Great...But Not If You Need Money Now

The reason personal finances is so hard is that it demands that we think near-term, mid-term and long-term pretty much all at once. Like any financial advisor, I love getting my clients on track for the post-65 years. But dreams of a cushy retirement are only moderately comforting if you unexpectedly have to replace your car next week. Worse yet, if you do have to reach into your retirement account for an emergency, you will probably pay a penalty 10% of your hard-saved earnings for the privilege of getting your money back. All of those well-advertised retirement accounts (401k, IRA, Roth, Pensions, etc...) are great vehicles for the long-term. And unless you have reached your 60's, they are pretty useless for dealing with life as it is right now. Put the retirement account on the list, but not at the top. Instead—start with your emergency fund.

Life is Poetry, Budgets Are Fiction: Why You Need An Emergency Fund

How many times has someone told you that all you need to do is create a budget and stick to it? The advice usually comes with an ugly but orderly spreadsheet and a sort of smug assurance that all you need to do is follow the numbers. But experienced advisors are usually happy to admit it—budgeting doesn't work. The reason of this is simple, really. You don't live in a spreadsheet.

It isn't just that people have emotions and stressors that flicker through their thinking, changing their decision-making moment by moment. We all know what it's like to leave the house with one plan for the day only to have chucked the whole thing out the window by lunchtime. The problem is that even if we stick to the plan, the world won't necessarily cooperate.

Budgets depend on the illusion that we can forecast the future, so they don't tend to leave room for broken tail lights and dry cleaner emergencies, much less emergency room visits and sudden layoffs. You can't control these things, and you can't plan for them, but you can create an emergency fund that will soften the blow. And this is the crucial part of thinking short-term—emergencies can happen next week or next month or even tomorrow. Make sure to start (but not necessarily finish) your emergency plan before you start on the long-term thinking.

Saving is Simple. Leaving the Money Alone? Not So Much

As every Top 10 Financial Tip list will tell you, you should auto-deposit part of your check every month into a savings account. But those lists often fail to mention what the savings is for. Creating an emergency fund and saving for a big purchase are very different things. In fact, you are almost always better off to use separate accounts for them. Let's call this second account the "Occasion Fund."  You use it to build up money for the big occasional spend (wedding, new place, the big birthday party...). Discount the need for these things at your own peril. Sure you can survive without them, but survival is not our goal here, and life demands some celebrations.

Unless you possess superhuman discipline, you will find yourself reaching for a just a little extra money from somewhere when they come up. It's better to have these moment in your plans. A word of caution, though—unless you are far wealthier than I, that fund won't cover every event you could turn into an occasion. This fund is all about mid-term thinking. Before spending out of this account look a little further into the future to decide which of the upcoming events in life most merit the spend.

Life Doesn't Work Step By Step

In the orderly world of planning, we want to tell you to do all these steps in order: first put aside 3-6 months expenses for the emergency fund, then start the long-term retirement planning, and then the occasion fund. But the truth is, this is rarely realistic. You do need to start putting money in for emergencies first. But it won't be long before that opportunity for a weekend away comes up. So, don't fight it. Split your automatic savings between the emergency account and the occasion account. Sure, it will take you a little longer to meet your goal in both accounts. But life, unlike financial plans, is about a lot more than the end goals.

And remember what I said about that Budget spreadsheet? I can't tell you when or why, but some day you are going to spend down one or both of those accounts. Stuff happens. Having charge of your finances means being knowing you have the know-how to build it all back up again.

Think Less Like An Employee And More Like An Entrepreneur

It doesn't matter whether you are in your first job or are at the high point of your career—you no longer have the luxury of thinking like an employee. You heard me. Gone are the days when a worker would make her slow but steady progress up the corporate ladder to land contentedly in a pensioned retirement (I can hear you murmuring, "wait, what is this 'pension' of which you speak?"). If you are going to weather the storms of the modern job market, you need to think less like someone's employee and more like an entrepreneur in the business of shaping her own career. Here are 5 strategies to borrow from the entrepreneurs: 1. Use The Good Times To Prepare For Changes. A successful entrepreneur always has a long-term plan, and she uses those period when finances are stable to make progress toward longer term goals. Those periods when you are reasonably comfortable in your job are the best times for thinking ahead. Make your steady paychecks work for you—use the drop in stress to put some effort into broadening your skills and contacts in preparation for the changes that could impact not just your current job, but your industry as a whole.

2. Negotiate A Great Job Title. One of the best benefits of working for yourself is the ability to choose just about any title you want. Being the CEO may not get you out of making copies or bookkeeping duties, but it does set the tone for how you want colleagues and clients to perceive you. If you are just starting work for a new company or are being promoted, ask for a great job title. There is nothing wrong with "Administrative Assistant," but "Program Director" or even "Associate Program Director" indicates to colleagues and future employers that you are aspiring to do more.

3. And While I'm At It...Negotiate More Often. I wrote on this in the last post on negotiating, but it bears repeating. An entrepreneur constantly negotiates with clients, customers and the market as a whole about price. But she is also always negotiating terms —often, it's not the price but those details in the contract that make an opportunity more profitable.

Even if you can't change your salary, that same attention to detail can mean the difference between being trained and certified in a new skill or being stuck permanently in your current job title. Remember, employers are scrambling as much as anyone else to figure out the best policies to strengthen their teams. Your requests, whether in the initial job offer or over the course of your employment, shape your own career and give your employers a better sense of where and how their businesses can improve. Still think you can't negotiate? Check out this recent article from Akane Otani in Bloomberg Business.

4. Tell People What You Do. Run into any seasoned entrepreneur at a party or a taxi stand and she'll probably find a moment to slip into the conversation what she does. What's more, she won't say "I'm an accountant" or "I work at a software company." She will give you a quick but specific description of what she does, something more like "I work on taxes for small businesses" or "I come up with new software codes to make your utilities cheaper." Why does it matter? A successful entrepreneur knows that people you run into randomly often become your best contacts. But they can't help you progress if they don't really know what you can do. Next time someone asks you what you do for a living, make sure you give her a real answer.

5. Be Financially Prepared For The Bad Times. Entrepreneurs are painfully aware that a little bad luck can lead to some serious financial pain. But being the best employee in the world is also no safeguard against losing a job. Whether it's a business failure, a global recession or some emergency that takes you out of work, bad things just happen. To cope with these risks, come up with an emergency plan.

Your plan should be personal to you—some people have partners or family members who can serve as a safety net. Others have the ability to draw passive income from a rental property or an investment account. If you don't have any of these options (and plenty of us don't), know how much you would need to get you through a temporary disability or job loss. Then check to see if your employer provides disability insurance as part of your HR package. If so, check your policy terms, and see if you need to add more.

Most importantly (and I can't stress this enough) start working on a financial emergency fund that covers 3 to 6 months of expenses. You probably won't be able to create this over night, but don't give in to the temptation to blend your emergency fund with the savings account you set up to buy that new house/vacation/car. Savings is about the future we can control—emergency funds are our recognition that there are always parts of life we can't.