I spoke on IM with an individual a few days ago who has a six month emergency fund (actually post-tax; it is equal to half of his annual salary) and is also debt free. He currently is putting the full amount into his 401(k) and is receiving employee matching, plus he has a fully funded Roth IRA as well. His question to me was, what now?
First of all, this man deserves a major congratulations. He has put himself into a very nice financial situation without being rich (he qualifies for a Roth IRA, after all), and he also has a very secure basis from which to live out his dreams.
In order to help him figure out what to do next, I asked him the following five questions.
How many years are you from retiring? In other words, how long do you plan to be gainfully employed for the purpose of building up your wealth? One can retire and still work a little at something completely enjoyable, of course.
Where do you see yourself in five years? I told him to spell this out in as much detail as possible, because the more details you add to the picture, the clearer the path to that picture becomes.
What is your level of acceptable risk – and what time do you have to follow investments? This is a pretty typical question. He seemed unsure what I meant, so I put it this way: if you had an investment that suddenly lost 10% in value, would you immediately want to sell that investment, or would you be completely comfortable waiting it out? What about 20%? If you can’t stomach any loss at all, then you should keep your money in TIPS or something to that effect; if you can stomach risk, then you can look at stock investments and so forth. Also, if you don’t have much time, you should look at managed or index funds rather than individual investments, which require time and research.
What is the first thing you think about in the morning? I found this to be a powerful exercise for figuring out what was weighing on my mind, because my first thought in the morning is usually related to a major task I need to accomplish that day. This is just a variation, of course, on “what drives you” or “what is your passion.”
What is the first thing you think about in the morning that brings you happiness? Hopefully, it’s that task; if it’s not, then you should move your life focus to that which does bring you happiness when you wake up. I find that this question, when paired with the one before it, indicates whether or not you’re heading down a healthy track in your life – and gives a good indication of what’s derailing you.
So, how did it turn out? Last night, the individual talked about his answers with me and it was pretty clear that he actually got a lot of personal fulfillment and enjoyment out of his current job and that he was fine with substantial risk, but he didn’t have the time or inclination to follow individual investments. Thus, I encouraged him to buy into a low-expense retirement fund with a target date far, far off in the future, like the Vanguard Target Retirement 2050 Fund (VFIFX). This way, it’s managed carefully, but it also includes a very strong dose of risk, which he is fine with right now considering he is far from retirement and doesn’t mind risk.