Planning for the “New Normal”
If you’re like me, you’re trying to figure out what the next steps are and when our “new normal” will settle in. I certainly don’t know when that will be, but I know that I am taking the most of this opportunity to be with my family, learn new technologies, and social distance (can we say Merriam-Webster word of the year?) to the best of my abilities. Another thing I am working on is getting my financial house in order. Yes, even we planners need to take some time to make sure we’re on course and have everything in place if something were to go awry! “The Great Pause of 2020” presents the perfect opportunity to do so.
One of the first steps in constructing a house is laying down a solid foundation. So, before you do the fun stuff like picking out your bathroom tile, paint, and all of your fixtures, you need to make sure the house is sturdy. The same goes with your financial planning.
Build a strong foundation for your financial house
Many families focus on the excitement of growing their money. It means they’re getting closer to whatever goal they have it set aside for and consider this their financial foundation. Most people’s portfolio dropped somewhere around 30% in late March. Did it crumble their financial house? Probably not, because they have a long-term focus with these investments. What hurts people during a pandemic, financial crisis, or other life altering event is not a drop in their portfolio. What hurts people is not having other key elements of their financial lives in place.
Consider each building block
What constitutes a strong foundation of a financial plan? Well, there’s probably an answer that is slightly different for everyone. Here are some of the building blocks to consider:
The unemployment number hit 30 million last week. One thing this has taught us is your income can cease or be reduced for an unknown period of time at any time. Imagine there was no CARES Act or government intervention. How would you be impacted if you lost your income? Liquid assets can be a life saver in times of uncertainty. I recommend keeping 3-6 months worth of expenses for a dual income family or 6-9 months for a single earner family.
Not having the proper amount of life and disability insurance can be ruinous. Many people ignore or underestimate this essential building block and the toll it can take on your family if the proper amount of insurance is not in place. Review your existing policies and coverages to ensure that your foundation remains intact.
Although it comes into place after you die, evaluating how your assets are passed to the next generation is a way to ensure your financial house lives on for generations. Determining how your 6 year old (or 26 year old for that matter) can use millions of dollars of life insurance proceeds and inheritance should be a top priority. A well structured trust can dictate when and how these assets are available to your heirs long after you’re gone. Everyone should have their wills, trusts, and medical directives evaluated at least once every 5 years.
Cash flow bucketing
Take a step back and evaluate your lifestyle. Do you like all of the extras you can afford? Do you want more or are you over-extending yourself? Try to bucket your income:
- First Bucket: This bucket will take care of your basic needs first (food, debt repayment, utilities, shelter, insurance premiums).
- Second Bucket: Once the first bucket is filled you can start to fill the second bucket with money to help pay for future expenses (think retirement, education, or wedding).
- Third Bucket: This final bucket is used for all of your other spending (dining out, vacations, and other discretionary items) and should only be filled once the first two buckets are addressed.
The bucketing system is a flexible system that can (and should) be adapted to what works best for you. Don’t feel bad by insisting that a vacation or occasionally eating out is a basic need. Just make sure you’re funding bucket #2 with enough to take care of those needs in the future.
Use the quaran “time”
Many times we are too busy to focus on these foundational things. While hopefully the worst of this pandemic is behind us, we all are still in the semi-quarantine phase of it and most of us still have some extra time on our hands. House cleaning and house projects have quickly jumped to the front of the to-do list. Can we consider some basic financial planning a “house project?” It will probably take less time to evaluate and organize your insurance, cash-flow, and estate planning situation than it will to plant a new flower bed in your yard.
I’m encouraging you to take some time to understand where you are in your current financial situation. If you’ve already done that, then start to put together some action steps of what you need to accomplish next. So if you need to update your will or trust, but haven’t done so yet, it’s a great time to start asking for referrals for a qualified estate planner. If you’re having trouble determining how much you should be saving vs. spending or bucketing your money, schedule a meeting with your financial planner.
Envision your future
These foundational elements are the building blocks of the big picture. Make sure you take time to think about them, consult with professionals that can assist you, and act on the steps needed to build your rock solid foundation. If you’re ever having some difficulty motivating yourself to take action and build your foundation, try to take a step back and envision what is most important to you. By using these key life elements as motivators you will develop the best plan forward for yourself and your family.
If you want help figuring out any of your foundation elements (or just need outside motivation to get it done), feel free to schedule a call with me.