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Getting Your Finances Ready for the Next Rainy Day — or Decade
It was Benjamin Franklin who once said, "The man who
achieves makes many mistakes, but he never makes the biggest
mistake of all — doing nothing."
As the nation continues to work its way out of recession and
investors begin to take stock of what looks like a lost decade
in their portfolios, it might make sense to execute some simple
ideas now that will give better preparation for possible tough
times in the future. After all, disaster can't be predicted, but
it can be blunted by preparation. Here are a few ideas to
implement as the economy recovers.
Start with expert advice. A fresh financial start
should begin with some solid, up-to-the-minute advice. Consider
making a trip to talk over your current finances and retirement
picture — no matter what state they're in — with your tax
advisor and a financial advisor such as a Certified Financial
Planner™ professional. Many people feel they've made mistakes
with their money that they'll never be able to repair, and the
only way that might be certain is if they don't properly assess
what they've done and should do in the future. Getting trained,
experienced advice is one way to change that.
Pay down your debt. There was once a time when
mortgage debt was referred to as "good debt," but even
that perception has changed for many families in recent years.
While mortgage debt has tax advantages, the relatively recent
tendency for homeowners to look at their property as a piggy
bank looks headed for permanent change. And with new credit card
lending rules on the horizon, Americans' relationship with
plastic is bound for big changes as well. Resolve to get a
better handle on existing debt and above all things, resolve to
pay it off in sensible fashion, attacking the highest-rate and
less tax-advantaged balances first.
Reevaluate your career plan. It's true that many
Americans will have to work longer than they planned to assure a
healthy retirement given the events of the last decade. But you
shouldn't stop there in making that assessment. As the country
comes out of this economic slump, you should also be considering
whether your current career meets your personal as well as your
financial needs. A chance to earn extra money would certainly be
great, but if you're unhappy doing what you're doing or you see
your industry going nowhere, then it might be time to retrain or
research a change.
Get serious about an emergency fund. If you suddenly
lost your home, your job, or were disabled with limited health
or disability benefits, how would you afford a hotel,
transportation or medical bills? How would you pay for all that?
Credit cards? Okay, but how would you pay off those cards? An
emergency fund needs to be three to six months worth of cash at
a minimum kept in an easily accessible place — not as accessible
as a mattress, but not in a stock fund or some other investment
that might fluctuate in value and then be tough to access for a
week or more. You need to treat that cash as money that isn't
there unless a disaster occurs. And try to open it with a high
enough balance so you'll keep it from being eaten away by any
account maintenance fees. Write down a list of things that are
potential emergencies and sign it as a personal contract with
yourself. That agreement should state that you will not touch
the funds except in case of some of the following:
- Loss of
employment;
- Medical bills
that exceed your insurance payments (if you have insurance);
- Emergency home or
car repairs in excess of insurance that are required to make
the home livable or the car drivable.
Insure yourself properly. Insurance exists to prevent
financial devastation. You owe it to yourself to buy whatever
coverage you can afford for risks that affect you directly. Not
everyone needs life insurance or particular forms of liability
insurance, for example. But most of us need help knowing what
coverage to buy, and that's where the help of a financial
adviser might come in handy. There is no one-size-fits-all
insurance solution. It's a good time to evaluate whether your
coverage in any of the following types of insurance is adequate:
- Health insurance
- Life insurance
- Home or rental insurance
- Disability insurance
- Auto insurance
- Liability
insurance related to a particular business or work activity.
Create a worst possible scenario. It's not the easiest
thing in the world to do, but based on your own personal
circumstances, what would be the biggest potential risks you
might face financially? Some examples:
- If there was
hereditary evidence cancer or heart disease among your
closest relatives, how would you pay for treatment if your
insurance didn't fully cover the costs?
- If you live in a
flood plain, do you have adequate federal flood insurance?
- If your company
has been losing money for the last year, how likely is it
you might be laid off?
- Will you need
additional training or education to stay in your job going
forward?
- If you were
disabled, how would you make up your lost salary?
August 2009 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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