Toasting Marshmallows (And Other Financial Secrets)

Marshmallows 3Remember sitting around the campfire toasting marshmallows? The warm, creamy golden brown deliciousness is etched in our memories. Achieving marshmallow perfection, however, was probably the result of trial and error.  Have you ever seen an overly excited youngster stick a marshmallow on the first stick available and shove it into the nearest roaring flame? The result will undoubtedly be one of two possible outcomes: either the stick is too dry and will burn, causing the marshmallow to be lost in the fire, or the marshmallow will catch fire and become a blackened, molten mess too hot and too ashy to enjoy. It’s a disaster in the making.  The lesson is best learned after losing one too many marshmallows: Toasting a marshmallow to perfection requires a green stick and a low flame. Add a slight turning action, and you have the makings of greatness.

Just as something as ordinary as toasting marshmallows over a campfire requires proper knowledge and experience, so does running your financial life to a toasty golden brown. Inexperience and impatience are the basic ingredients of financial disaster.  Here are a few examples of financial flameouts that are sure to leave an ashy taste in your mouth: 

  • You overhear someone talking about a stock and how it can’t miss—and your reaction is to go buy it without researching the company or understanding the risk. Irrational exuberance and a fear of missing out fuel bad financial decisions.
  • You find out that you can take advantage of a stock’s price movements by investing in options. Puts and calls are bets that the stock will rise or fall over a specified period of time. Although it takes very little capital to buy or sell option positions, the chance of being on the wrong side is huge—especially if you don’t own the underlying security.
  • You recognize that life insurance is important because you have debt and a family, so you decide to sign up with your workplace’s supplemental life insurance because it’s easy and it’s cheap. Think dried stick and massive bonfire.  Life insurance is not a throwaway benefit. Inadequate life insurance could mean complete disaster for your family.
  • You don’t make it a priority to build and maintain an emergency fund. Not having an emergency fund is akin to dousing your marshmallow with gasoline—the results will be inedible and disastrous when you encounter a job loss, unforeseen emergency or short-term need.

Not having a financial plan that encompasses consideration and careful action is the same as grabbing a dried-out stick and stuffing on 4 or 5 marshmallows and throwing them into the midst of the bonfire.  Failure is all but assured.

When pondering your financial life, consider the following:

  1. Knowing what you know and what you don’t know is a pretty important place to start.
  2. Increase your knowledge where it’s lacking. There are great resources available to you, such as Jonathan Clements Money Guide 2016. Hire a CFP® to help make sure he or she is acting as a fiduciary (legally required to act in your best interest).
  3. Think in terms of short-term, mid-range and long-term plans. For example: An emergency fund is a short-term need; retirement (if you’re not about to retire) is a mid- or long-term plan. Invest according to the time frame available and the amount of risk you’re willing and able to undertake.
  4. Understand your money mindset by considering what you learned about money as a youngster. If you’re struggling, you might have grown up without strong, supportive money beliefs. Time to question what you consider to be “normal” in the world of responsible financial management.

Don’t worry about it if you’ve made some mistakes along the way; experience is a great teacher. Oh, and don’t forget to rotate your marshmallow so it gets that toasty brown on all sides!