What to Do When Life Happens

Financial Planning for the Unexpected

This week’s Money-Guy podcast was inspired by the simple fact that life happens. Even though we try to plan for everything, we can’t possibly know what life is going to throw at us next.

So how can we financially prepare ourselves for life’s emergencies? How can we work in financial planning for the unexpected?

Brian and Bo are big on planning with an emphasis on being flexible, and they’re providing the steps you can take now to ensure you’re prepared for when life happens and you have to adjust.

How You Can Plan for the Unexpected

Brian has six recommendations on how you can get your finances in order before a major life event happens:

Create Emergency Savings

This is an absolute must — you need cash savings held in a liquid account that can help get you through any unexpected financial disaster. From an expense you weren’t prepared for to a loss of income, your cash reserve can get you through some tough times.

Brian and Bo recommend thinking about how long you might be out of a job to determine how much you need.

Maintain Insurances and an Estate Plan

Having an estate plan is especially important if you have children, as you want to assign guardianship for them. You should also have enough life insurance coverage that your family’s needs are taken care of in the event that you pass.

Avoid Being Life-Poor But Retirement-Rich

You should have some liquidity in the event that something unexpected does happen. While it’s great to fund retirement accounts, you’ll be glad to have extra reserves in a taxable brokerage account for when life gets hectic.

Be Flexible with Your Finances

You need to be flexible enough with your finances that you’re not committing to any one direction. Don’t be on the extreme end of the spectrum.

Know When It’s Okay to Scale Back

While Brian and Bo consider themselves hyper-savers and normally encourage others to save as much as possible, there are times when it makes sense to ease up. It’s more than okay to cut back on saving if your life circumstances necessitate it.

Find the Positives

When an unexpected situation arises, try to find the positive in it. As an example, think of the countless successful entrepreneurs out there that started their companies after being laid off. They decided to turn their unemployment into an opportunity. 

The most important thing when financial planning for the unexpected is to find the ability to pivot and adjust. We all will need to deal with some unfortunate situations and less-than-ideal circumstances throughout our lives. It doesn’t need to be the end of the world if you can prepare as best you can and maintain flexibility in your finances.

5 Investment Mistakes Couples Make

Investment Mistakes Couples Make

Have you talked with your spouse about your investment strategy, or what the purpose is for your investments? Investing can be tricky enough alone, but it’s extremely important to include your other half in investment decisions so that you’re on the same page about how your money is being put to work.

If you haven’t yet discussed investing with your partner, you should read on to be aware of the common investment mistakes couples make so that you can avoid them.

Mistake #1: Only One Spouse Has Contact with a Financial Advisor

It doesn’t matter if one of you is more comfortable with the idea of investing. Both of you should be attending meetings and calls with your financial advisor because you’re in this together. You both have an equal stake in how your portfolio performs.

In the event that something happens to the spouse handling investments, the other will be lost when it comes to picking things back up. Avoid this burden by working as a team.

Mistake #2: Not Being Clear on Common Goals

You should be investing with a goal in mind — whether you’re aiming for early retirement, funding your children’s college expenses, or saving up for a down payment on a house in five years.

Are you and your spouse in agreement on your investment goals? If you haven’t talked about investing beyond “it’s the right thing to do”, then you should. Otherwise, you might face an issue down the road where one spouse wants to withdraw money early from a retirement account for an expense that was never discussed.

Mistake #3: Investing Without Being Informed

Just because your investments might be managed by someone else doesn’t mean you should blindly follow their advice. You should absolutely know what you’re investing in and be a part of the decision process.

Never be afraid to ask your advisor questions. They should be able to answer them honestly, and they should want you to understand the reasons behind their investment decisions.

Mistake #4: Not Taking Advantage of Employer Matching Contributions

Do you and your spouse have a 401(k) retirement plan offered through your employer? Are you contributing enough to receive the amount your employer will match?

If you don’t know the answers or aren’t sure, you need to look into this. You could be leaving free money on the table. You should be able to ask your HR department about the details of your retirement plan.

If you’re not sure what matching contributions are, here’s an example of how they work: If your gross annual salary is $75,000 and your employer matches contributions up to 6%, then that means you have to contribute 6% ($4,500) of your salary for them to match that contribution.

If you only contribute $3,000, then you’re missing out on $1,500 from your employer. Likewise, anything above $4,500 won’t be matched, but you’ll still be funding your retirement.

Mistake #5: Being Unaware of How Your Advisor is Paid

One of the biggest mistakes you can make is hiring an advisor without knowing how they get paid. Are they fee only, do they get paid a commission, or a hybrid of both?

This is important because you want to ensure there’s no conflict of interest when your advisor recommends certain products to you. If they make a commission off of sales, then they might not be looking out for your best interests.

You should also check to see if your advisor is a fiduciary. If they are, then there’s no doubt they’ll be acting in your best interests, as financial fiduciaries are required to do so upon taking an oath.

To avoid these common investment mistakes couples make, remember that investing requires teamwork. Neither of you should be working alone when it comes to financial matters.

If you don’t have confidence in your knowledge of investing, you can always learn from the many resources available to you online. Building wealth through investing will ensure a successful financial future, and it’s not a matter to take a backseat on.

Fiduciaries: What They Are and Why They Matter

Fiduciaries

Have you heard the term “fiduciary” before? It’s may not be a term you use every day, but it’s extremely important to understand when it comes to your financial situation.

If you have a financial advisor managing your assets, you’ll want them acting as your fiduciary. Here’s why.

What Is a Fiduciary?

Fiduciary means “involving trust,” and someone acting as a fiduciary has undertaken the responsibility to provide the highest standard of service for their clients. That means fiduciaries eliminate conflicts of interests and put the needs of their clients above everything else.

Trained, certified, and educated professionals act as fiduciaries for average individuals in a number of fields, including finance. They have highly specialized knowledge that isn’t common across a general population, and as such they can make the right, informed decision about complicated issues where other people may not have the knowledge to do so successfully.

That’s why it’s important your financial advisor acts as your fiduciary. A professional who takes a fiduciary oath swears to act in your best interests at all times. Having a financial advisor act as your fiduciary ensures that your needs are put first.

Why It’s Important that Professionals Work as Fiduciaries

If you’re worried about a financial advisor being motivated to recommend certain products because they make a commission on them, then having a fiduciary can erase that worry. Since they are committed to your financial well-being, they will only recommend products they truly believe will work in your favor.

This also means they won’t try to push you to buy certain financial products that you don’t need or don’t make sense for your situation.

Essentially, your fiduciary will be biased toward helping you. If you ask for their opinion on two different products, they should be able to explain the benefits and drawbacks of each, and then explain their reasoning for picking one over the other in your particular case.

Having this trust also makes it easier to form a relationship with your advisor. If you ever need to consult with them on your financial goals, you can do so without the worry that they’re only out for themselves.

Their number-one goal should always be to build and preserve your wealth to the best of their ability.

Finding a Fiduciary You Can Trust

As you want your relationship with your fiduciary to be based off of trust and respect, it’s important that you find an advisor willing to answer all of your questions. They should be transparent about their practices and the products that they sell (if any).

Do your due diligence in researching advisors, and be aware of the different ways advisors get paid. A fee-only structure further ensures that advisors only get paid what you pay them — they don’t earn commissions off what their clients do.

However, if an advisor is fee-based, then they can charge a flat fee or get paid via commission. Ask your advisor about their fee structure and make sure it’s going to benefit you. There shouldn’t be any hidden fees.

And don’t be afraid to ask an advisor, “Are you a fiduciary?” or “Would you be willing to sign a fiduciary oath before working with me?” If they refuse to act as your fiduciary, it may be in your best interest to look for a different financial professional to have on your side.

Fiduciaries take their oaths extremely seriously and won’t jeopardize your finances for their own gain. Being able to trust your advisor with your assets will go a long way toward giving you peace of mind when it comes to your portfolio.

Knowing When to Go Pro

Hiring a professional financial planner could possibly be the key that unlocks the door to your financial success.  At the same time, choosing the right advisor to work with is an important decision that can often seem overwhelming.  In today’s show, we discuss the services that planners will and will not provide as well as key things to look for when hiring a pro.

In the March edition of MoneyAdviser, Consumer Reports outlined what typical fee-only planners will and won’t do for their clients:

What they will do:

  • Help you figure your net worth:  Typically, a planner will have the client gather the necessary data and then create a statement to uncover other planning opportunities, such as insurance analysis or estate planning.  (Do-it-yourself tip:  Collect current statements for all assets and liabilities and use an online net worth calculator, such as Mint or Yodlee, to determine your net worth each year.)
  • Advise you on 401(k) investments:  Your planner should be looking at all the pieces of your financial puzzle, including your 401(k) to ensure that your saving and investing goals line up across the board.  (Do-it-yourself tip:  See if your 401(k) plan sponsor offers access to investment guidance or check out the online retirement-planning program, Financial Engines, for additional support.)
  • Help you invest a lump sum:  A planner should be able to offer tax-efficient investment advice to their clients, as this is a core activity of financial planning.  (Do-it-yourself tip:  Use Morningstar software to research mutual funds and stocks for your portfolio.  Also, check out Bo’s Money-Minute about investing in a lump sum vs. dollar cost averaging.)
  • Determine if you’re properly insured:  Your planner should be able to evaluate your insurance needs, as well as refer you to an agent that can provide the coverage.  (Do-it-yourself tip:  Do as much research as possible and shop around for the best rates.)
  • Assess if you’ve got enough to retire:  A planner can determine whether you are on track for retirement or if you need to explore other options, such as working longer or changing your lifestyle.  (Do-it-yourself tip:  Assess your potential income sources, including Social Security, and use an online tool to calculate where you stand.  Consumer Reports recommends T. Rowe Price’s Retirement Income Calculator and Analyze Now’s Free Retirement Planner.)
  • Coordinate your retirement income:  Planners can determine the best method for drawing funds from your various retirement accounts, while considering tax consequences.  (Do-it-yourself tip:  Consumer Reports advises that unless your retirements consists entirely of Social Security and a pension, you might want to consult a professional on this one.)
  • Help you plan for college funding:  A planner can guide you on the best ways to finance your child’s education.  (Do-it-yourself tip:  Visit www.collegeboard.com, www.savingforcollege.com, and www.finaid.com for additional resources.)

What they won’t do:

  • Help you pay down debt:  As a general rule, fee-only financial planners refer such clients to a debt counselor or a bankruptcy attorney.  (Do-it-yourself tip:  Contact the National Foundation for Credit Counseling if you need help with debt.)

The gray area:

  • Help you control your spending:  While many planners recommend following a budget, it’s not cost effective for you or the planner to spend hours together developing a detailed budget.  Most planners are interested in overall cash flow and will recommend cutting back if needed.  (Do-it-yourself tip:  Create a spreadsheet or utilize budgeting software like Quicken, Yodlee, or Mint.)
  • Create an estate plan for you:  Planners can help you decide the structure and tax efficiency of your estate, but an estate-planning attorney will be needed to draw up wills, trusts, and end-of-life documents.  (Do-it-yourself tip:  Contact an attorney to prepare or review your documents.)

If you decide that hiring a financial planning professional would be beneficial for you, the following credentials should stand out to you:

  • Certified Financial Planner (CFP):  holder has passed a 10-hour exam, has at least three years’ financial planning experience, and has completed an approved course of study.
  • Chartered Financial Consultant (ChFC):  requires eight college-level courses in financial planning and 30 hours of continuing education every two years.
  • Certified Public Accountant/Personal Financial Specialist (CPA/PFS):  CPA with specialized training in personal finance.
  • NAPFA – Registered Advisors:  holder meets strict education and professional requirements for membership in the National Association of Personal Financial Advisors, for fee-only planners.
  • Chartered Financial Analyst (CFA):  holder completes a series of three six hour exams and has four years of qualified work experience.

Hopefully this information will be helpful if you are considering hiring a professional to guide your finances.  Check us out on Facebook, YouTube, and please leave any questions or comments below!

 

Links to other things mentioned in today’s show:

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