The Money Rules I Keep - and Break - as a Financial Advisor

A version of this article was originally written for and published on Business Insider

As a financial planner and owner of a wealth management firm, I work to ensure our clients have the absolute highest probability of achieving their long term goals.?

That often means giving specific, exact advice on what they must do (and avoid). Our aim is to create a system that works as reliably as possible.

We’ve worked with enough clients to have certain sets of guidelines and heuristics we know work for increasing net worth and wealth… and I have so much confidence in that system that I follow its rules myself.

Most of the time, anyway.

While I follow my own advice 9 times out of 10, there are some big rules that I happily break—and one that I follow without exception.

The biggest rule I break: Keeping an emergency reserve

Our general guideline for clients is to keep 3 to 6 months' worth of expenses in cash on hand . We recommend keeping that money in a highly liquid vehicle, like a high-yield savings account or money market account.

The priority with your emergency fund is access and safety, not returns.

But personally? I find myself virtually allergic to keeping cash on hand. I want to funnel most of my available dollars into investments for long-term growth, or back into my business so that it can generate more revenue. I don't keep much cash on hand that isn't earmarked for a specific use in the next few months.

I take that risk for a few reasons. The biggest is that I simply have a high risk tolerance. But I also feel confident in my situation even without a formal emergency fund because:

1. I own my business, so have more control over my income than someone who works for a single employer. Even if business revenue dropped, it's unlikely my personal income would go to $0 overnight in the same way it could if I worked for a company that could lay me off at its discretion.

2. My wife and I do have some cash in the bank. This money is set aside for various savings goals connected to future spending (like a travel fund and a "date night" fund). While it's earmarked for specific use, we can pull from these cash pools in a true emergency, delay the planned spending, and then work to pay the slush funds back later.

3. I have access to easy-to-liquidate assets, like iBonds. From these kinds of assets, I could generate cash relatively quickly in a true emergency (although I'd give up some interest that I otherwise could have earned by doing so and I take the risk of not being able to get to my money as quickly as I could if it were simply sitting in a bank).

The other big "rule" I ignore: Investing very aggressively relative to my age

If you Google “what should my stock-to-bond allocation be,” you might see a general rule of thumb suggesting to subtract your age from 100 to get to the percentage of your portfolio to keep in equities.

I’m 44, so this guideline would have me set up with something like a 60/40 portfolio.

Indeeed, most of our clients, who are also in their 30s and 40s, have portfolios allocated from 60/40 at the very conservative end to 80/20 on the more aggressive end.

But my portfolio has a 90/10 allocation because I have a much more intricate understanding of market risk and the impact of market downturns than the average person. That's not to say I'm smarter or cleverer than the average investor; I certainly don't pretend to know what the market will do next.

What I am confident in, however, is my ability to not change my strategy in the face of short-term market movements that might alarm a less-seasoned investor.

Therefore, I take more risk because I’m confident that I can comfortably stay in my seat through the only thing I do know with almost 100% certainty:

The market is volatile. Corrections are normal. Drops along the way are to be expected (and are not a reason to panic).

I made the choice to optimize for as much growth as possible, because I also know I still have a relatively long timeline between now and when I plan to start actually tapping into portions of my portfolio.

That means I not only have the risk tolerance for a more aggressive allocation, but also the capacity to take the risk as I still have time to ride out the short-term market highs and lows.

The finanical rule I refuse to break: Save (at least) 25% of gross income

I urge my financial planning clients to prioritize their savings and investments. I do the same with my own personal finances.

The rule I always keep, no matter what, is to contribute at least 25 percent of gross income to investment vehicles designed for long-term growth . That includes a mix of 401(k)s, IRAs, and taxable brokerage accounts.

In the past, this number was higher. We'd regularly save upwards of 40 percent of our income. Once we had our daughter, however, we shifted our spending and savings plans to accomodate both necessary additional expenses (like childcare support) as well as choice spending (like more trips as a family, because it's important to us to provide those experiences to our child).

That means we're saving less than we used to, but a 25-percent-of-income rate is the absolute minimum. Why is this such a hard line for us?

Because my number-one priority in managing my money is to create wealth that will support me and my family now and well into the future. My wife and I want to ensure our own future financial security, and also provide our daughter with more financial stability than we had as kids.

There are various actions I can take to accomplish this goal, but the one that I feel most confident in - and the one that is most under my control to influence - is how much of our household income we put toward building our net worth via our investment portfolios.?

Setting aside 25 percent of household income is a non-negotiable for us. My wife and I build our budget around the fact that we are committed to this savings rate; what we can spend is determined by what's left over after we save.

Most rules are there for a reason: they help guide us; they keep us (or others) safe; they help us understand how to navigate what otherwise could be a chaotic mess with no way to reliably know what we should do in certain situations.

But rules can also unnecessarily limit us or slow our progress toward our specific goals. Truly mastering a subject means recognizing when that's the case, and when it's time to shed a guideline that's no longer working.

Context always matters, and helps inform when we need to toe the line—and when we should feel free to confidently break the rules.

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