Football & Finances
December 18, 2020
Close your eyes; you are in a crowded stadium - fans cheering all around. At the center of it all - is you. A football grasped firmly in your palm, lineman scramble to give protection while the receivers zig and zag down the field hoping to shake off the defender. The running backs and a trusted tight end hang back for a short pass just in case the long ball isn’t there. 11 players, one team, one goal – To score.
Open your eyes. You are no longer a football quarterback, but you are the quarterback of something even more important - your finances. It’s time to view your financial health from a new perspective to help you make the smart plays to win the game.
- Find a coach and listen to them
You need to find someone to be the Bill Belichick to your Tom Brady.
According to a survey done by Standards & Poor, 43% of adults in the U.S are financially illiterate. Only one-third of states require students to take a personal finance course in high school. Because it is not a focus in our schools, many Americans are left to figure it out on their own. Look for a financial expert close to you that you can trust. Someone who can be an unbiased adviser who commits to your best interest.
- Build a strong offensive line.
Imagine the endzone as a comfortable retirement, whatever that looks like to you. The path to retirement and financial security can be formidable, e.g., medical emergencies, sudden loss of employment, etc. Imagine the other team's defense as these obstacles. To protect yourself financially from these obstacles you need to build an appropriate amount of savings.
This is known as an emergency fund and should be equivalent to at least 6 months of income. Emergency funds should be incredibly liquid or cash, not hidden in assets such as stocks or real estate. When managed correctly, an emergency fund will protect you during financial hardship, so your long-term financial plans are not affected. Back to our analogy, a solid offensive line will protect the quarterback from scary defenders so they can focus on getting the ball down the field.
- Play Making
As a quarterback, you call the plays. It’s all about scoring, but you can’t score if you don’t have the ball. It is important to analyze risk and reward and always consider how much time you have left on the clock. Let’s learn about different financial plays you can make to get you closer to retirement.
- The running play
Some plays are safer than others. A hand-off to Todd Gurley will generally get you at least a few yards with limited risk of a turnover. It may eat up a lot of clock and take a few plays, but a strong running game will eventually get you to the endzone.
Just like in football, there are safer financial plays that pay off over time. Think of low-interest/low-risk investments such as savings bonds and Certificates of Deposit (CD’s). This varies by age and retirement goal. If you are farther away from retirement this is the play that should make up about 15% of your investment portfolio. As you approach retirement, more and more of your money should be in these types of investments.
- The short pass
A short pass is usually simple to catch and has a lower interception rate than passes that are thrown deep. This play may help you get a bit more yardage than running the ball but is also incrementally riskier.
In our scenario we can think of short pass plays like stock mutual funds. Stock mutual funds allow you to purchase small pieces of many different stocks in one transaction creating instant diversification. These funds often track an index, like the famous S&P 500 Index. Historically these investments have provided a return of around 8%. Like a running play, this a long-term play. As a financial quarterback, you should call a mutual fund play about 80% of the time.
- The deep ball
Russell Wilson and DK Metcalf deliver on this one. While Wilson and Metcalf make this look so easy, a deep ball play is high risk. It is difficult to throw accurately, leading to interceptions and tough to catch, leading to dropped balls. However, you will also notice that both Wilson and Metcalf have generated more fantasy points than anyone else in their positions; the lesson? high risk = high reward.
Investment portfolio-wise this may be an individual stock. Individual stocks are risky and can be costly, so only choose individual stocks if you believe in the company’s potential for long-term growth. The smallest investment of your portfolio should be individual stocks. These are the riskiest investments, especially when you are trying to save for something long-term, like retirement.
- Stick to the game plan
Once you have developed a good financial game plan make sure you stick to it. A good way to ensure you continue saving and investing is to make the transactions automatic. Set up withdrawals from your Direct Deposit every pay period to your savings accounts. Many 401K plans have options to automatically increase your employee contribution each year. Good financial quarterbacks use all available tools to help win the game.
Close your eyes. You are back in the game. There is great protection, and you are nestled in the pocket with all the time in the world. The receiver races to the endzone and as he approaches, you throw the perfect 30-yard pass. He catches and scores!