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- I’ve been a financial planner for 15 years, and in that time I’ve helped clients prepare for the future — whether the future brings opportunity or hardship.
- There are four ways I suggest to “future-proof” your finances: diversify your investments, save cash, get the insurance you need, and find a budgeting framework that works for you and stick to it.
- Being prepared in this way means you can take on opportunities as they present themselves, and protect your family if the unexpected strikes.
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From clients losing jobs unexpectedly to getting huge promotions, major stock market drops to the longest bull market in history, unexpected diagnoses to unexpected inheritances, I’ve seen a lot over the last 15 years as a financial planner.
As I continue to work with clients through the current global pandemic, I’ve been thinking a lot about how to help clients “future-proof” their finances. How can I help clients be ready to take advantage of opportunities and still be OK if things don’t go as planned? How can we effectively plan when we’re uncertain what the future holds? Here’s my advice.
Make a plan for your goals and stay diversified
As the saying goes, if you aim at nothing, you’ll hit it every time. Although it’s likely that your goals will evolve over time and things may not work out exactly as planned, you’ll likely find that you’ll still be better off aiming for something, moving towards it, and adjusting course, rather than not aiming for anything at all.
As you invest for long-term goals, keep your investment portfolio diversified to mitigate the risk of taking a huge bet on one company or one sector that doesn’t pan out. Investing gives your money the opportunity to grow, which means you can potentially reach your goals much faster than through saving alone. It’s also historically been a solid way to protect your finances from the risk of inflation.
And consider diversifying from a tax perspective, too. Don’t get overly focused on saving taxes now and forget about what taxes might look like later. What if tax rates are much higher in retirement than they are today? Give yourself flexibility in retirement from a tax standpoint by considering a combination of traditional and Roth retirement accounts.
I’ll never forget when I heard the news that my client, and friend, had a brain tumor. We had just completed some planning work a few months prior, and I recommended $1 million of 30-year term life insurance since he was in his early 30s with young kids. He hadn’t gotten around to getting life insurance, and then went into the emergency room after a head injury playing basketball. He found out that he had a brain tumor.
He survived, thank goodness, but getting him insured after that diagnosis has been virtually impossible.
One of the hardest things to help clients with is finding money for goals when they have super high fixed expenses, like debt payments. For every $1,000 in monthly debt payments, that’s about $18,000 of annual income sucked up by debt. So my advice is always to use debt, but use it carefully. And before you commit to a big fixed expense, think about how it reduces your budget flexibility month-to-month.
In addition to month-to-month flexibility, having savings in an FDIC-insured high-yield savings account will give you flexibility to handle all kinds of things. From job loss, to investing opportunities, to medical expenses, to home repairs, cash gives you the ability to handle what comes along without digging a debt hole or cashing in investments at the wrong time.
It recently dawned on me that I’d been thinking about laundry all wrong. I’d been thinking of it as a finite task on my to-do list. But doing laundry isn’t a task; it’s a habit. It’s never really “done.” The same goes for saving.
Saving is a habit, not a finite task or goal. Whether it’s buying a car or a home, paying for fertility treatment or starting a business, you can use your savings habit to work towards various goals as you move through life.
Find a budgeting framework that works for you and make it a habit. You don’t have to track every penny to budget effectively. In fact, I recommend that clients focus their budgeting effort on two things: put the right amount towards goals, and avoid accruing debt. If those things are handled, spend the rest and enjoy it!
Knowing what’s coming in each month, being intentional about saving for goals, and staying out of credit card debt are habits that will serve you well over time.
Make investing a habit. Investing consistently over time is among the most important drivers of long-term returns. Even if you don’t know exactly when you’ll retire or exactly how much you’ll need, build the habit and start moving in the right direction. Retirement plans offered through employers are a great place to start.
At the end of the day, there’s a lot we don’t know about what the future holds, but that doesn’t mean you can’t make progress by “future-proofing” your finances.