Is it me, or did 2016 seem to just fly by? Like any year, it was filled with ups, downs, surprises, joy, sadness and lessons to be learned. We endured through Trump vs. Hillary, sat in shock as the Cubs actually won the World Series, and I am still trying to figure out the obsession with Hatchimals. Nevertheless, December is always a good time to take inventory of ourselves, and especially our finances, heading into the New Year. Whether 2016 was a prosperous one and you want to keep the momentum going, or it was a year you would soon like to forget or at least improve on, the good news is that 2017 offers that chance to start new and be financially healthy, both for now and the future. It all begins with asking yourself some important questions BEFORE the New Year starts, so that you can evaluate where you stand currently, in order to make the necessary changes and hit the ground running in 2017. Financial health and well-being is all about personal evaluation. You have to constantly be assessing the situation, monitoring cash flow, and ready to make changes as the need arises. The first two questions are general, big picture questions that affect every aspect of your financial world (and affects the answers to the other questions that we will be asking later) and need to be answered first. Once we get a feel for them, we can dig deeper and move into more specific questions, all adding up, hopefully, to making 2017 your best year yet.
Did Any Major Life Changing Events Happen in 2016?
With all of my clients, I like to do a year-end review session, and this is the reason why. Life changes in the blink of an eye, and your financial situation in March can be far different than the one you are facing in November. Start with your family life. Did you recently get married or engaged? Divorced? Is the wife pregnant or deliver a child? Did a key family member pass away or fall very sick? The main point here is that no matter what, any changes in this regard will have an impact on your finances. Whether it’s another mouth to feed and budget for, a spouse’s income now being added to the household cash flow, or maybe medical bills or an income being taken away, the key is you need to understand the impact it will have on your finances and react in a rational, level headed manner.
Next, move to your own income. Focus on the cash flow coming in. Did you get a new job? Maybe you suddenly found yourself unemployed? Did you get a raise at your current job? Are you job searching with the plan to make a change? These answers will obviously have an impact on your finances for 2017, but have you made the necessary adjustments? If you are making more, are you saving more? What are you doing with the extra money? If you make less or are unemployed, have you cut back and made the necessary budget to reflect this change? We cannot just continue to live the same way based off of the past. As cash flow and income change, we must change with it, and do it in the most optimal fashion.
Finally, take a look at the big purchases or moves you have made in your life this year. This focuses less on what is coming in and is more concerned with what is going out (debt and financial obligation). Did you buy a house? Did you go from renting an apartment to now paying a mortgage? Are you living in a totally different area geographically? Maybe your car totally blew up and you had to replace it recently? Major purchases and major changes add extra bills and debt to our balance sheet. We need to evaluate how those changes will affect our finances going forward and make sure that the plan we have in place to cover them is indeed solid and a viable long term solution.
Did My “Why” Change?
This is an extension of the first question, and is actually the most important one to answer. It does not involve facts and figures, rather a look deep inside yourself for some personal reflection. Everyone has a “why” in life. It is the reason we do the things we do; the reason we get up in the morning and go to work, the reason we keep dealing with that boss we hate just so that we can make the paycheck every two weeks, the reason we only go out to eat once a month in order to save as much as possible. Everyone has a “why”, and everyone’s is different. Many people would say their “why” is so that their children can live a good life and not want for anything. Others would say because their spouse is the most amazing, patient, supportive person on Earth and deserves to be taken care of (I know mine is). Some people want to change the world and have a positive impact, whether through their own personal greatness and talent or through selflessness and generosity. Perhaps you are dying to start a business and turn your passions into a successful career. Maybe you just want to be able to enjoy your later, retirement years without running out of money. Whatever your “why” is, whatever that motivation is, we need to understand that it drives everything we do and a lot of the decisions we make financially. A change in your “why” will definitely force you to adjust your plan for your finances in 2017. I see this frequently when someone does, in fact, get married or have children. They go from a single person only worrying about themselves and their own wants/needs to suddenly thinking for two or three or four. Their “why” changes from “because I want to be able to go out and enjoy my life and do whatever I want” to “my daughter is the most precious thing on Earth, and I want to make sure she is taken care of and happy for the rest of her life”. This forces you to start thinking about college savings, life insurance, budgeting, debt control, things that a single 22 year old probably never even thinks about. I know my “why” has changed drastically from when I was 22 years old and fresh out of college to today, and I am sure yours’ has too. Sit down and think about why you do the things you do. What drives you to do these things, and live the way you live? Then ask if your financial decisions and actions reflect that “why”. If the two are not in rhythm, it may be time to make some changes. The remaining questions in this article are much more specific but keep the answers to the previous two in mind as you read them. It really will shed some light on your financial plan for 2017 and what, if anything, needs to be adjusted.
Am I Saving Enough Money?
It is probably the simplest, but most critical question you can ask yourself when looking at your finances. I know I harp on this a lot, both on this blog and with my clients, but the number one problem most people have financially is that they are not saving enough money. Whether it is long term savings for retirement, short term savings for an emergency or crisis situation (unemployment, medical issue, car troubles etc), or any reason in between, saving money should be at the forefront of any financial plan. Sometimes, it is not the client’s own fault, as circumstances have made it difficult to save money. Surprisingly though, I find that most clients who have trouble saving money are more than capable of doing so, if they simply adjust certain habits and lifestyles they have grown accustomed to. The old saying is true, “Cash is King”, and in today’s world, it has never been more important. I try to advise clients to save anywhere from 15-20% of their income, saving into various accounts that include everything from your 401k/IRA retirement plans and cash value insurance, to investments and liquid cash in the bank. It is an ideal, perfect world, number that I realize some people cannot do right now. Maybe that is a goal for 2017, to get to that point by 2018? Maybe start at 10% and work your way up, or 5%, or whatever you can do. Anything is better than zero. When I am 50 years old, I’d rather have a problem of “what am I going to spend all of this money on” as opposed to “how am I going to be able to afford all of this.” The next article in this blog will be all about saving money and specific strategies and plans to help guide you through the process. Pay yourself first! Build your savings, build your wealth. You can do it!
Am I Managing My Debt Properly?
Nothing can be more crippling to financial health than debt. Credit cards, student loans, personal loans, mortgages, they all can be disastrous, but if managed properly and optimally, there is a light at the end of the tunnel. First, we need to look at which debt/bills are taking priority. Which ones are you paying the minimum on? Which ones are you overpaying a bit? The debt with the highest interest rates should be getting the most attention, then focus on the ones with the shortest term and highest balance. A lot of people like to overpay their mortgage or student loans to be done with them early, and in some cases it makes sense, particularly if there is some sort of equity benefit or financial opportunity that can come from it. However, if you are overloaded with high interest credit card debt or a 20% interest personal loan, it can be the wrong move. If you have no liquid savings in the bank to cover an emergency, then it is absolutely the wrong move. The interest rate on a mortgage varies but usually averages between 4-5%, the same with a federal student loan. In most cases, I would much rather use that extra money to help pay off a 15-20% interest rate credit card or personal loan or build some sort of savings or emergency fund. High interest debt just eats away at your finances like a disease. Keep paying the minimums and you are hardly making any dent on the balance at all. This means you will just get caught in the cycle forever, turning it into the worst of both worlds, high interest, and a longer term period. Also, look at your savings. If you are light there, and unprepared for some sort of emergency then maybe you want to re-allocate some of that overpayment of debt to that account. Making an extra mortgage payment three times a year is wonderful, if you can afford it, but if you only have $800 in your bank account, what are you going to do if you lose your job or have some sort of medical emergency? The mortgage is not going away just because you lost your job. Be prepared!
What Happens If I Die or Become Disabled?
This is another crucial question to ask that a lot of people don’t even consider. Basically, the main point here is to assess your life insurance and disability coverage as you head into 2017. What if you get hit by a bus? Do you have enough life insurance coverage for your family to be taken care of if you suddenly pass away? Many of you have life insurance through work and that is great. But those policies only cover a small amount like 1 x your salary etc. They are designed to cover the funeral and some short term expenses. This will not be enough to get your family through the next 5,10,20 years of life without your income that they have been relying on. Changes in your personal situation affect how much coverage you need as well, so it is important to constantly monitor everything. Did you get a raise at work? A new job that includes a bump in salary? Did you have another child? Maybe you bought your first house? These changes, usually, all require an increase in coverage. A new child or mortgage vastly increase the amount that will be needed to cover expenses should you pass away. A raise at work obviously means your family will be living off of more now, and therefore will need more coverage to replace the extra income. What about disability insurance? Keep in mind, just because that bus hit you, does not necessarily mean that you will die. You could be severely disabled and unable to work. In fact, statistics show that you are more likely to become disabled than you are to die at any given stage of life. Again, many large companies offer disability and this is wonderful. However, on average, it only covers up to 60-66% of your salary, and this is before taxes. Can you and your family live on 40-45% of your normal income? What about if you are self-employed and have no coverage through work? Disability is an even larger threat to your financial stability now. Either way, just like life insurance, your best bet is to get a private disability policy outside of work to make up for the gap in income and restore it to the normal levels you and your family have grown accustomed to and rely on. In most instances, these policies are cheaper than life insurance. Remember, protection first!
What Big Expenses/Purchases Are Coming In 2017?
We all have been in this spot once or twice before. We know we have some big purchase or expense coming in the future and rather than deal with it now, we just ignore it. Then, next thing you know, that time comes and we are left scrambling financially, wondering how it could just sneak up on us like that. Sound familiar? It is prudent to look ahead now and plan for any big expenses or purchases that may be on the horizon in 2017. Are you getting married in the next year or two and planning a wedding? Maybe you have a big vacation in August planned for you and the kids? Do you just know that the old car is not going to make it through another year? Try planning ahead for this and start to either put some money away now, or adjust your budget to account for the future expense. Trust me, it will make that purchase feel a lot less stressful and financially damaging. Some of these expenses may be recurring and faced every year/month/quarter, like property taxes. If they have been a problem in the past, try saving for them now, a little each month for it, if you aren’t already doing so. What about Christmas gifts? I am sure we are all going through a little bit of the crunch right now with the holidays, especially if you have kids. The reason that finances get a little tight this time of year is because most of us are unprepared. Why not plan for next Christmas NOW and start a little savings fund for it? It goes for any major purchase or expense throughout the year. Wouldn’t it be better to have these expenses already covered, without having to dip into your paycheck or worse, go into more debt with high interest credit cards?
Am I On Track To Retire When and How I Want?
No matter what age you are or what stage of life you are at, it is never a bad time to review your retirement accounts and plans to make sure that they are in line with your goals, objectives and timelines for retirement. If you are not on the right track, it is time to get on the right track. The last thing anyone wants is to be working at 75 years old. You should be putting some percentage of your income away for retirement. Again, life events play a role in this assessment too. Did you get a raise at work? Maybe you want to put the extra money into your 401k or IRA. How did your investments/retirement accounts perform this year? Maybe you need to adjust to the changing market conditions. Are you getting into your late 40’s or early 50’s? It is time to really sit down with someone and come up with a plan. Maybe you need to move some of your assets out of risky investments and be more conservative as retirement approaches. The good news is, with this or any of the questions asked today, if you need any help, a financial planner or advisor would be happy to help walk you through everything. It can be daunting and sometimes confusing but a financial planner is well equipped with the tools you need to not only answer those questions, but formulate a plan to keep you financially fit, healthy and happy for 2017 and beyond.
Peace and Wealth 