What a drag! Taking care of finances is bad enough, you say (especially when the news is not great), but now you are telling me that I need to also be vigilant? What do you mean and how much time is that going to take?
I am so glad you asked! Financial vigilance can take many different forms. Some will definitely apply to you, and some may not. Let’s look at some financial subjects that demand regular attention and you can decide how much time to allot to each based on your unique circumstances. Sound ok?
Financial goals are spending, saving, and investing targets you hope to achieve over a set period. They vary with lifestyle and stage of life. What you value in life also plays a key role. If you are young, you may save for your first car. When you start a family, your goal may be to own a home or put money aside for your child’s education. It is never too early to plan for retirement. You may have education or other loans to repay and that is an important goal. Setting financial goals is critical.
Goal setting is not a one-time event. It is an ongoing process. For example, when you enter the workforce your goals might include buying furniture for your apartment, travel, and starting to save for retirement. You meet someone special and decide to become a couple. Your goals now include another person and together you set new priorities. Children may enter the picture and once again your goals change. As you age, you may start to think about your legacy and how you want it to be reflected. That may shift your goals.
It is important to review your goals with any major life change but even without any major changes, set a regular review schedule—maybe every five years just to make sure you are still on track; and don’t forget to celebrate along the way whenever you meet a goal.
Income Versus Expense Analysis
If you are struggling to cover basic expenses with your current income, this analysis is especially important. I must admit that I did not make a concerted effort to track my spending until I felt the mid-life panic that comes from a projection of what I might need for retirement. As a financial advisor and planner, I was not immune to the perception that my retirement was far in my future. After all, I still had many earning years ahead of me and I enjoyed my career. I was setting aside money regularly in my retirement account, living comfortably, and enjoying my passion for travel.
The turning point for me was when I decided to start my own financial planning business. I decided to go through the same financial assessment process as my clients, and it was revealing. Although it was not terrible, at the rate I was going I would not have enough saved to have the life I wanted in retirement. I did not have (and still do not have) huge needs. I do not need millions of dollars. My goals were (and are) to continue my lifestyle, including travel; spend time with my sisters and children and grandchildren; attend events and eat out with my friends; perhaps develop new hobbies; contribute to causes important to me; and enjoy the world around me.
My plan told me that I was going to have a far different lifestyle than I imagined. That is when I took a long look at my expenses. I tracked what I was spending and was surprised! There were definite adjustments I could make. As a single person, I was spending far more money eating out than I thought. Clothes were another weakness. One category I still struggle to contain is what I gift to others. I am not talking about charities, although I do my share of that. I mean gifts to my family and friends for birthdays, anniversaries, and holidays.
I set a new goal for saving for my retirement and, with the adjustments to expenses, started on a much healthier track.
Portfolio Asset Allocation Adjustment and Rebalance
Asset allocation is the target percentage of stocks and bonds, 60% stocks and 40% bonds, for example. If your parents started investing for you when you were a small child, they were likely very aggressive, maybe even allocated 100% to stock. With a child’s portfolio, if the stock market goes down, there is typically time to recover before the money is needed. If that portfolio is meant to pay for the cost of education, then it typically becomes more conservative the closer you get to college or tech school enrollment. The allocation to stock in a portfolio decreases while the allocation to bonds and cash increases.
A similar situation occurs when you get close to retirement. You want less volatility which means a more conservative portfolio. But at the same time, you need to cover an ever-growing cost of living that includes medical expenses. You also want to be able to do all the things you planned for retirement: travel, play golf, take up a new hobby, or spend time with the grandkids. However, unlike education, retirement may last ten, twenty, or more years. If you want to not only keep up with inflation but also continue to grow your nest egg, it is imperative that you keep part of your portfolio invested in stock. Depending on your life expectancy, health, and other income sources, a delay to any asset allocation change may be appropriate until later in retirement. If you have questions or doubts, seek the advice of an advisor who is a fiduciary, a person with a legal responsibility to put your interest first.
In addition to conscious adjustments in allocation for life changes, your allocation will also change with market movement. Because the prices of stocks and bonds are constantly moving up and down, over time the rise and fall can affect your asset allocation. For example, let’s say your target allocation is 60% stock and 40% bonds. If you find that the stock portion of your portfolio has grown to 68% while the bond portion decreased to 32%, it is time to rebalance your outfit. That is different from changing your target allocation. A rebalance is the process of bringing your portfolio back to its target allocation. Plan to review your portfolio for a potential rebalance annually and when there are major market moves.
How do you change your asset allocation and/or rebalance? You could sell the overweight piece and buy the underweight piece. That may not be wise, however, especially if your securities are in a taxable account. Sales in a taxable closet could trigger capital gains which are subject to tax. Another alternative would be to stop buying the overweight asset and only add to the underweight asset. Or you could buy both but overweight one compared to the other. The latter alternatives might take more time to get to your target allocation, but they could also keep you from unintended tax consequences.
Within your portfolio, it is also important to regularly review your choices of investments. How have they performed compared to their peers? What kind of analysis you do depends on the type of asset—stock, bond, mutual fund, exchange-traded fund, etc. This will be the topic of a future blog so “keep tuned”.
At least weekly I receive mailers that suggest that I could save money on my auto/homeowner/medical insurance if I just make a phone call. I usually throw the mailer in the trash, but from experience I know that I need to go through the process of comparison at least every few years.
The last time I compared the cost of auto insurance is a good example. The same company has insured my cars for years and years, but I was encouraged to compare costs by a friend who had just saved a wad by changing auto insurance companies. I decided to see if I could save too.
The first thing I did was to write down the amounts of my coverage and any deductible or uncovered items. If I wanted to compare, it had to be apples to apples. Fair! I made three phone calls and talked to and received a quote from three companies. I got a great quote from one of them and almost signed on the spot but decided to share the quote with my existing company and see if there was any chance they would lower my premium to, or near to, that level. I felt some degree of loyalty and thought it worth a try.
I explained the situation to the phone agent of my existing insurer and told him I was going to transfer my insurance because I could lower my cost substantially. He asked if he could put me on hold (good manners and training) while he checked on a special program that he thought might apply to me. The bottom line is that I ended up with a quote from my existing company even lower than my lowest other quote. It pays to shop!
Estate Document Review
As a financial planner, I saw some very sad situations due to a lack of attention when life circumstances change. With any major change—death, divorce, children, marriage, etc.—legal documents need to be reviewed, reassessed, drawn, or redrawn.
I will never forget the wife of a deceased client who sat before me crying because her husband had not changed the beneficiary of his retirement account from the former wife he divorced years before. Her husband happened to be a new client to our branch, and we had not had the chance to review his accounts and his beneficiaries with him. He had obviously unintentionally overlooked this detail and it left his new family in a financial bind.
My personal estate planning documents were originally drawn in Illinois (newly married and no kids). When we moved to Arizona (a community property state) and started our family, they were all reviewed and redrawn. When I divorced and moved to North Carolina, they were again revised. Back to Arizona and another review. (States have different legal requirements so it is essential to have a review after a move.) My sons became adults and I decided to make some changes to give them more control.
The people I want to make decisions about my health—both medical and mental—have changed. How I feel about life-prolonging efforts has changed. How I want any remaining assets distributed has changed. Some of my non-profit beneficiaries have changed. For those of you with minor children, the people you name to take the responsibility to raise your children may change.
For most of us, these changes do not happen frequently, but the consequence of no change can be devastating. Please do not assume that the above list is all encompassing. You are unique and your circumstances may require other analyses. Financial diligence should not be taken lightly. It may make the difference in the life or lives of those you love.
Some of the above topics are covered in more depth in my book, How to Dress a Naked Portfolio. It is available on Amazon in both paperback and e-book format. It may also be available in your neighborhood bookstore. Please refer to my website, bevbowers.com, for that list.
Bev Bowers, CFP®
Legal Notice: This document is intended to be informational only. Beverly Bowers does not render legal, accounting, or tax advice. Please consult the appropriate legal, accounting, or tax advisor if you require such advice. The opinions expressed in this report are subject to change without notice. The information in this report is from sources believed to be reliable but are not guaranteed to be accurate or complete. All publication rights reserved. Use of this material is subject to the Copyright restrictions described on BevBowers.com.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark and the CERTIFIED FINANCIAL PLANNER™ certification mark in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.