In life, we all learn to expect the unexpected. For example, a plan to run errands could always end with a trip to get ice cream…or with a flat tire. The unexpected can seem daunting, but that shouldn’t stop you from making a financial plan to set yourself up for a brighter financial future.
A financial plan involves thinking about what’s important to you. What do you want to achieve a year from now or 10 years from now? Think of it as a financial vision board. You will look at all aspects of your current financial picture and develop an action plan to help you meet your goals.
In fact, a comprehensive financial plan should cover the unexpected, giving you space to feel comfortable in the face of uncertainty. Here’s how a solid plan helps you prepare for whatever may come.
Nobody wants to think about what could go wrong when planning for the future. But it always helps to be prepared.
Most advisors recommend setting aside an emergency fund to cover approximately 6 – 12 months’ worth of expenses, which could help cover anything from a sudden illness to a layoff without interfering with your overall financial picture. This will vary from person to person; if you feel secure with your employment, for example, you may want to keep less.
The purpose of an emergency fund is to protect your investments. For instance, what if something happened in the middle of a market downturn and you needed to pull funds from your portfolio? You would be locking in those losses (or paying taxes on gains in the case of a market advance). But with an emergency fund in place, you are in control and don’t have to touch your investment portfolio, giving it the time it needs to recover.
One tip to start building your emergency fund is to set a regular contribution to a separate savings account through automatic deposits with each paycheck. This way, it is out of sight and out of mind, but if the funds are still needed, you can access them. Similar to saving in a 401(k) or taxable portfolio, challenge yourself to increase your contributions. If you start to feel pressure on your cash flow, you can always make adjustments.
Another issue that’s tough to think about is how we can provide for our families when we are no longer here. As we saw during the pandemic, the unexpected can always happen, so this is a task that should no longer be put on the backburner. Besides, knowing your loved ones will be secure in the future can be a great comfort.
Estate planning typically starts with thinking about what’s important to you and where you want to see your assets go after you pass away. For example:
- Are there any unique circumstances that you should be considering?
- Do you have a family member with special needs or someone who may not be financially responsible if they were to receive an inheritance?
- Have you thought about who should be the guardians for any minor children?
- Is there a specific charity that you would like to give to?
In addition, you also want to think about your own personal directives like a healthcare directive or power of attorney, so someone you trust can make financial and healthcare decisions on your behalf if you were to become incapacitated. I recommend consulting with an estate attorney to assist you with these decisions and draft the necessary documents, like a will and trust, to reflect your wishes.
Life insurance is another difficult but crucial aspect of financial planning. When a loved one passes away, it is an emotionally devasting time. If your partner provided the primary source of income, it could also be financially devastating. Life insurance is meant to help protect your financial plan, so your loved ones do not have to worry about meeting short and longer-term financial obligations while grieving. Do you want to be able to pay off your mortgage or college tuition? You can work with a financial planner to help you determine an appropriate amount of coverage.
Umbrella insurance is another policy that you should consider to protect against the unexpected. Home and auto policies only provide so much coverage. For example, if you or someone in your family were in an accident, you could easily be sued for amounts exceeding those limits, which would put your assets at risk. Umbrella insurance provides coverage over and above your home and auto policy for a reasonably low cost.
Health and disability insurance are other important components of your future financial wellbeing. Although an unexpected health issue, disability, or disaster may still cost you, reviewing your coverage will help to ensure you have what you need to survive financially in the event of the unexpected.
Reviewing Your Plan
Unexpected developments don’t have to be a bad thing. You might get a raise, sell your home for more than expected, or start a new business. No matter what comes your way, it’s important to continue reviewing your financial plan over the years to adjust for the unexpected and rethink your path to your financial goals.
When you work with a financial advisor, reviewing your plan will help ensure that you are still on track to meet your goals. This includes evaluating any adjustments to your cash flow, determining if your asset allocation is still appropriate, strategizing for current and proposed tax laws, reviewing your insurance policies and beneficiary designations, etc. A financial plan will help provide a sense of confidence because part of the process includes stress testing your portfolio and planning for the unexpected.
Need help getting started?
Uncertainty can be daunting when you face it alone. Why not work with a team that only has your best interest at heart? The fee-only financial advisors at Team Hewins can help you build a financial plan that puts you at ease every step of the way.
Team Hewins, LLC (“Team Hewins”) is an SEC registered investment adviser; however, such registration does not imply a certain level of skill or training, and no inference to the contrary should be made. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas.