Suresh of Get Financially Integrated is an expert in managing your finances across the board. He spoke with us about putting your finances together and how to make it all work together.
What does it mean to be "financially integrated"?
Financially integrated is my utopian vision of having all aspects of your financial life humming along in unison. Your total debt picture, your ability to save, your investments, your earnings from work, your retirement planning and even your taxes! There are a lot of moving parts to the personal finance picture, and people are prone to focusing on the one or two parts that are really obvious or that stand out to them the most. Focusing on one or two things and neglecting the others can mean that you don't optimize your overall financial health.
What could be better about how we approach our finances? Do we "compartmentalize" the different parts of finance too much?
Having the ability to get a total unified picture of your finances is very important, in my opinion. Being able to see at a glance how much you earn and where and how you are spending can help you identify corrective action if things are not going so well, or help assist in working towards goals. For instance, if you can see your entertainment budget is out of whack, it becomes easier to take action to rectify it.
In general, people are prone to just look at one or two things, such as bank balances or total debt. But you may not be able to see the forest from the trees by taking such an approach. Your bank balance may be swelling, but it could be at the expense of a more robust focus on your retirement accounts. Having an overall picture helps tell the complete story.
Debt is common in American households. Are we taking on too much, and why?
I think whether someone has too much debt needs to be looked at in the context of their ability to service it. If you have the majority of your monthly free cash flow being used to service debt, it comes at the expense of you being able to grow a substantial nest egg to meet your retirement goals. So while you may a lot of nice new shiny toys, you may be heading for a very painful retirement.
I think you also have to distinguish between "good debt" and "bad debt" when trying to evaluate if you have too much debt in general. Good debt is what I consider contributing positively to assets that grow in value over the long term. Things like shares and property will increase over the medium to long term if you have the patience to let them grow. They can also produce cash flow for you in the form of dividends and rent. So having debt that funds these sort of assets can actually be a good thing. I've had significant amounts of this debt in the past, sometimes too much, but in general it's been very valuable in helping generate a passive income of close to $30,000 per year for us.
Unfortunately, most of us have the "bad" kind of debt. This is generally the debt you find that goes to just buying more "stuff." It's typically credit card debt or auto loans, or personal loans, or assets that decrease in value over time. People are better off running this debt down to zero if they can. As a family, we try and make sure we don't have any of this type of debt ever.
What is some common confusion about personal finance that you often see?
One of the biggest misconceptions I've seen is that stocks are a very risky asset class and should be avoided by most people. Folks are starting to say similar things about real estate after the sharp declines in the last few years.
Nothing could be further from the truth. Sure, asset prices will move around in the short term, but if you have a long-term view and are happy to hold companies that are profitable, with strong business models and that generate cash flow, it is unlikely that you will come out behind. In fact, we have virtually 95% of our assets in asset classes like shares and property.
Conversely, there is also this idea that bonds are "safe." While you preserve your capital, inflation is causing a steady erosion in what that capital is worth year in, year out. If you aren't careful, you may come out worse off in a low yielding bond fund, particularly in an environment like the present one where interest rates are particularly low.
Also, this idea that you need to hold your money in some star hedge fund or high-performing managed fund is also one that doesn't make sense to me. Finding a low-cost index fund that mirrors the S&P500 will help with more than respectable returns long term (close to 9% historically). That sort of performance should get most people to a respectable retirement without the necessity of getting into expensive, higher-risk managed funds.
Finally, this notion that all debt is bad is something that I don't agree with. It's hard to own your own house or generate significant wealth without taking on at least some debt!
How do you set financial goals for yourself? What's realistic and what's not?
My macro financial goal is to achieve early financial independence. What this translates into for me is the ability to stop working, should I choose to, and still cover all of my families expenses with just our passive income. All of my financial goals are in support of this macro financial goal. We have identified a passive income for us of about $75k as being sufficient to get us there. Ideally I'd like to get there by the time I'm in my mid 40s (I'm currently in my mid 30s). We should be on track to generate about $45k in passive income by next year. So that means still more investing and continuing to pay off debt. I keep annual goals for how much passive income we aim to generate each year, and where we would like to see our debt levels at.
We have a couple of kids, so it's not realistic to assume we can achieve financial independence on $20k annually by living a completely frugal lifestyle. It's also not realistic for us to be debt free in our asset-building phase and still achieve our desired passive income goal. For others, trying to contemplate an early financial independence may not make any sense if they don't have any history of regular savings and investment and a lot of personal debt that needs to be paid off. Your financial goals have to be relative to what you've been able to achieve financially to make sure you have a hope of achieving them and don't get demoralized by missing them.
What upcoming trends in person finance should we be aware of?
The biggest trend that I've been watching with interest in personal finance is the emergence of alternate asset exposures for individual investors. Stocks, bonds and cash in people's portfolios have made way for peer-to-peer lending and commodities like gold and metals. This move to alternate asset exposures has been made possible as a result of technology that has brought the ability to invest in asset classes that were limited to investment professionals to the everyday person. I've come across a number of folks who have embraced peer-to-peer lending and have seen good success. I remain a little cautious myself. Having said that, I've created my own mini Venture portfolio to explore emerging asset classes!
I think you'll also see the emergence of more and more people managing their own money. Low-cost access to information and cheap trading tools are widely available. While the events of the global financial crisis may have scared people, I think it's probably also awakened a lot of folks into having better awareness of where their money is and what it is doing for them. Taking money management into your own hands is a good way to ensure that you are set up for long-term financial success.
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