Drown-Proofing Your Finances

We all know that we should plan for retirement and our kids’ college education. Like many other things in life, it’s simple but not easy and the how-to keeps plenty of financial planners in business. But what about the stuff you never see coming—anything you can do to protect yourself from drowning in the unexpected?

Have an emergency fund. Yes, it’s obvious in theory but apparently most people don’t believe it because few people have an even barely-adequate one. Yes, you have insurance (you do, don’t you? See below!) but there are plenty of things insurance doesn’t cover. A few:

  • veterinary bills;
  • dental work (insurance is rarely worth the cost);
  • deductibles on multiple policies (such as you drive your car accidently through your garage, or the house and the car burn in a fire or float away in a flood);
  • the cost of repairs or care when insurance doesn’t pay the full bill, one person gets really ill and the other person has to take off work to care for them or investigate or arrange care (unbelievably time consuming),
  • a loved one needs psychological care (few health policies pay the whole cost of this);
  • your car develops sudden, expensive repairs or you suddenly need a new one;
  • the new ones I hear about nearly every week.

In fact, many, many disasters could be avoided if an emergency fund were in place.

You say you have credit cards for that? And so did many of the people now facing bankruptcy because disasters multiplied, forcing them to put more and more on a credit card while they often had less and less income.

You’ll just cash in investments? How about in March, 2009 (market bottom,remember)? Tap your retirement fund?  You’ll either get taxed on that or have a loan to repay. And a lot smaller retirement fund.

Continually upgrade your professional abilities. Join and keep active in whatever networking groups are applicable to your profession. Take any opportunities your company or professional association offers for skill upgrades. Take more classes at night or weekend workshops. If you ever get fired, you’ll know people and your resume will be fresh.

Don’t quit the day job. If you want to start a business, write a novel, change careers, do it part time. That way you can test out the viability and find out whether you really like it. Sure it takes time. Sure you’re tired. Sure it’s hard. Sure it takes herculean discipline. All of which are true, but more so, once you do quit the day job.

Also, after talking to oh so many stay at home moms going through divorces, I strongly advise anyone to keep a part-time or consulting foot in the door of their career. It’s far easier to re-activate a career from part-time than from scratch. Sure you’re madly in love, have the perfect marriage, and will never be in that situation. Unless your spouse suddenly becomes disabled. It happens. And, the impact on your future Social Security benefits can be dismal if you take a decade or two off of earning.

Live below your means and especially control your housing costs. Yeah, I know we’ve all heard it. It’s hard to live in a big city. Anyone can cut back on eating out, travel, and electronics purchases but ratcheting back the mortgage is much harder. Instead of living large for the neighbors, smile to yourself when you compare their new car to how much money you have in the bank, er, no-load mutual fund portfolio.

Don’t have all your wealth in your house. In an emergency you can’t spend equity, and it can be very hard to get a home equity loan if you suddenly have no income. People near retirement should be very careful about using significant cash assets to pay off the house if they have no other savings. (Whether to pay off is too complex and individual to discuss thoroughly here).

Understand what’s in your retirement accounts. Some people are very focused on saving, but park the money in investment choices that are absolute crap. Surprise, you’re 58 and your retirement is a disaster. Listen to the presentations, read the brochures, and learn something about investing. It won’t hurt, I promise.

Never, ever sign for your kids’ college loans. They have a lot of time to repay them. You don’t. If your kids don’t have enough initiative to be participants in their college funding, I wouldn’t say the future looks too bright on the employment front for them, either.  Better clean up that basement room now.

Don’t borrow more than you will make the first year after college (or any other education). That way, you can pay it off in 10 years with a reasonable kick to your future income. If you can’t make it with that level of borrowing (combined with work, financial aid, individual scholarships, and whatever parental aid can be cajoled), you can’t afford to attend a traditional, full time, four year college. There are plenty of other ways to get an education and you’re going to need to explore them. It’s a good thing—you’ll have more self-reliance, more marketable skills, and you won’t decide to major in something dopey. Really, it’s not as hard as paying off a quarter of a mil for a degree in communications.

Don’t do everything for your kids and don’t pay for everything. You set their expectations too high while destroying their own initiative. The kid that has a job in high school (as opposed to 7 extracurricular, paid-for activities) is, IMHO, much more likely to have a job after college! Would your kid be willing to earn part of the money to pay for all those extras? If not, maybe you ought to save yourself the cost of those music lessons, language camps, etc.

Pay attention to insurance. Make sure you have it. Then make sure you re-evaluate it every 2 years or so for coverage and cost. Get some quotes. Be sure the values are current.

Take advantage of any government program for which you are (or your loved ones) are eligible. Veterans benefits, Social Security disability, whatever—don’t be too proud. These programs are designed to provide a safety net and sometimes we all need that net. You paid taxes for it. I paid taxes for it, so use it already. You won’t be the first person going through a divorce who ever applied for food stamps.

Face up to age. Get your estate documents in order. Sacrifice for long-term care insurance. Talk to your parents about their finances, and let your kids in on your “secrets”, too. (Who do you think will be making the decisions?) Don’t stay in your house until you’re too feeble to walk out on your own. Make some plans while you have choices.

Clean up the place. Junk, clutter and deferred maintenance reduce the value of your assets, damage your possessions, and can cost a ton of money to your heirs and anyone responsible for your care should you suddenly become disabled or need to sell in a hurry. Any realtor can tell you about the beautiful home gone to wrack and ruin by terrible housekeeping and neglected maintenance. Anyone willing to buy and repair a wreck is going to expect a discount far exceeding the cost of repairs. After all, they have to factor in THEIR labor cleaning up and fixing YOUR crap.

Pick any one of the above pointers, do the opposite, and you’re living on the edge. Save yourself now! And be careful out there.

About the author

Danielle L. Schultz, CFP®, CDFA

Danielle L. Schultz, the principal financial planner of Haven Financial Solutions, is a CERTIFIED FINANCIAL PLANNER™ (CFP®), a NAPFA-registered Financial Advisor, and a Registered Investment Advisor in the State of Illinois. She studied financial planning at Northwestern University’s Certified Financial Planner™ certification program. She also holds a Series 65 license (Registered Investment Advisor Representative) and a CCPS (Certified College Planning Specialist).

She writes a regular column for Better Investing magazine and is currently working on a revision of their mutual funds handbook. In addition to academic training and professional experience, Ms. Schultz has personally managed Social Security, Medicare, retirement and long-term care issues; college funding concerns; and cash flow and transition planning in self-employment and divorce situations. Her social work background gives her an innovative perspective on financial planning issues; for her, financial planning is not only about money, but also a key component in a satisfying and well-lived life.

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