Fact one: Life transitions happen. Fact two: Life transitions typically carry with them a financial ramification and they rarely add to your wealth. Sometimes they’re lightning fast; say, like getting married. One day you’re single, the next not. Or sometimes they last for an unspecified period of time and might include job loss, divorce, illness, moving to a new location, retirement — any of a multitude of challenges that might or might not have been planned.
With all the possibilities that transitions hold, navigating the challenges successfully begins with making sure your financial life is in order. For many, especially during the super busy work years, financial decision-making takes a backseat to the urgencies of life. Yes, you might have signed up for employer-sponsored insurance plans and your 401(k), but in-depth planning and examination of what life might unexpectedly present might have escaped your focus.
Get Your Finances in Order Before Transitions Hit
When transitions hit or, better yet, BEFORE they hit, taking time to get your financial house in order will undoubtedly make the ride smoother, if not more purposeful.
- Take a financial inventory of your current wealth by creating or updating your net worth statement. You want to account for your savings, investments, properties, retirement plans and any debt.
- If you are like many, you pay your bills but don’t really spend time examining the impact of your spending. It’s vitally important to understand what it costs you to live each month and then separate out the fixed costs (mortgage, taxes, insurance, debt payments, food, utilities, etc.) from the discretionary costs (vacation, entertainment, gifts, etc.)
- Consider the threats to your safety and security by checking your financial situation against your risk-mitigation package. In other words, how much risk are you taking in your investments and is it appropriate for your situation, and how much risk have you off-loaded to the insurance industry. Understand the impact of catastrophic occurrences like death, disability, divorce, liability lawsuits.
- Create a list of what you want out of life. What are your dreams, goals, wants, needs? Unless you know where you’re going, it’s pretty hard to get there.
These four steps might be super challenging for a lot of reasons. One reason might be that financial matters give you a giant headache and you know (in your heart) that you’ve been “faking it” when it comes to making financial decisions. You might not be able to make up for mistakes with a “good year” or a sizable bonus and kicking the can down the road is just crazy.
Finding a Financial Planner
Going through life without a sound financial footing is like building a home on quicksand…it might look good in the beginning, but the long-term prospects are just not great. If you’re married or in a committed relationship, getting on the same page is really important. Having a serious money conversation might be something like speaking a foreign language and requires knowing what you know and what you don’t know. You might need a financial planner (I didn’t say wealth manager, insurance salesman or stockbroker) and or a therapist who can help you create the necessary infrastructure for making good decisions.
If you’re not sure how to find the right person, start with www.napfa.org. NAPFA represents the “fee-only” segment of the financial services industry. Using planners who have a fiduciary responsibility to act in your best interest rather than those who charge a commission for products they sell is an important distinction.
Preparedness for Peace of Mind
The result of planning should be a written plan that details what YOU want and what is financially responsible given your specific circumstances. It should cover every aspect of your financial life from cash flow, investments, risk management, taxes, estate planning, retirement and college planning and be focused on your specific goals and needs. Good planning considers the impact of life transitions. Are you prepared for a job loss, illness, birth of child, death of a parent, or retirement?
Getting your financial house in order is all about peace of mind; and who doesn’t want that?