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.

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:

Is This the End of Popping Vitamins?
On the Job, Beauty Is More Than Skin-Deep