It is easy to live with a false sense of security that our financial lives are “in order”. However, sometimes things are not as they appear. Take the 100 mile an hour goat for instance. Two guys are hunting in the woods when they come across a clearing and a really deep hole. In fact, the hole is so deep they can’t see the bottom. One man says to the other, “Let’s get something and throw it down the hole to see how long it takes to hit bottom.” They scurry around to find something, but all they can find is an old automobile transmission. They carry the transmission to the hole and toss it in. About that time they hear a rustling in the bushes and look up to see a goat running straight at them doing about 100 miles an hour. They both step aside and the goat jumps head first down the hole. A farmer appears from the other side of the clearing and says, “Hey, have you guys seen my goat?” “As a matter of fact, we have,” says one of the men. “Your goat came out of the bushes running straight at us and jumped into that big hole.” The farmer replies, “Oh, that couldn’t have been my goat. I had my goat chained to an automobile transmission.”
Like those hunters, sometimes our actions can have unintended consequences. It is important to know what the potential consequences can be from our financial action plan. First, if you have no plan, you face a future of uncertainty, potential financial devastation, and possibly unnecessary litigation. Having no plan can lead to a big deep hole that seems to have no bottom. Don’t walk—Run to professional advisors that can assist in getting a well defined plan in place to accomplish your financial goals.
A financial action plan to “get your financial house in order” should include consideration of the six following financial disciplines: Estate Planning, Risk Management, Cash Management, Retirement Planning, Tax Strategies, and Asset Allocation. Each discipline requires you to answer certain questions that only you can answer. Let’s examine some of those questions.
Estate Planning requires you to answer these questions: What do I have? Where do I want it to go? How do I want my heirs to receive distributions--lump sum or on-going income? Who do I want to serve as my successor trustee, executor, POA power of attorney for financial matters and health care matters? Do I want to spare my heirs the hassle and expense of probate? If my beneficiaries were to predecease me, where would I want their share of the estate to go? Do I want to include my church or charity in the distribution of my assets?
Risk Management addresses these issues: How will my spouse and dependent heirs survive financially in the event of my premature death? Am I properly protected if faced with catastrophic illness, disability, long term care, and property and casualty loss?
Cash Management looks at the challenge of maintaining a properly funded emergency fund. Do I have three to six months of my living expenses set aside as readily available resources, with checkbook access, for all of life’s little emergencies? Am I maintaining good records and receipts for accounting purposes?
Retirement Planning reveals the importance of having a nest egg that will fund my eventual "non-income earning" years. If I am still in my pre-retirement years, what target amount of money must be attained in order to maintain my same standard of living throughout retirement? Once that is determined, then I need to know how that goal translates into a monthly accumulation amount that will fulfill the retirement goal. If I am in retirement, what distribution amount could I withdraw periodically, if necessary, without prematurely exhausting the principal throughout my lifetime? What rates of return will be required to accomplish all this?
Tax Strategies can help you reap net benefits to your annual revenue, total net worth, and even gross estate distribution. What strategies could lower my current taxable income? Could I benefit from financial tools that generate tax deductions, tax deferred accumulation, and tax free distributions? With the current complexity of the tax code, is my reluctance to hire a professional actually costing me more than I even realize?
Asset Allocation is the selective placement of your investable resources into goal-focused investments. To assist you in your selections and tailor your investment vehicles around your objectives, your advisor should help you with certain questions. What is my risk tolerance, investment objectives, and time horizon? Do I want to utilize an active management strategy that will move my funds into the market and then back to safer havens from time to time? Or, do I want a traditional static “buy and hold” strategy. Since the market meltdown, that approach is often referred to as "buy and hope.” In light of the fact that some major indices are still below where they were ten years ago, many wise investors are finding it necessary to not only ask about the buy discipline of the plan but also ask about the sell discipline as well.
Certain life events, such as retirement, can often bring an acute awareness of how well we have planned. After one man retired and sat around the house awhile, his wife said to me, "Help, my husband has just retired and doesn't know what to do with himself.” She continued, "I just realized I now have twice the husband and half the money.” Evidently, she was questioning the trade-off. To properly prepare for those inevitable events, one must properly plan. Your plan should obviously be geared towards your goals; however, to determine your goals, you must answer specific questions.
Now that you know the questions, seek diligently until you have answers for all of them. Getting one's financial house in order starts from wherever you are today. Make a plan and work your plan. Revisit these questions occasionally in light of your goals. And be careful about throwing things into dark holes.
Posted on Wed, November 21, 2012
by John G. Gillespie, CEP, RFC®