Financial Planning is great until….
Financial Planning is great until life gets in the way and then you got to do what you got to do. I am a big fan of financial planning. Financial planning is what I do for my day job. A financial plan can help individuals organize their financial life and potentially put them on a path of independence.
However, I am also aware of the pitfalls of financial planning. It does take time for clients to compile and gather their financial data. The financial planning interview requests the client to bear their financial soul which is a challenge since most people really don’t like to talk about money. Once the data is gathered and the inquisition is over then the financial plan is created and delivered. A “typical” plan, a leather-bound 215 page door stop, usually calls for individuals to save tens of millions of dollars for retirement, purchase hundreds of millions of dollars in life insurance, hoard millions more in a cash reserve and, gulp, if you have children you will need to set aside a few more million for college. These dollars are daunting and usually drive a client into financial paralysis to which nothing gets done.
What is a family to do when life gets in the way of a financial plan? The four horseman of the family financial apocalypse are cash, debt, retirement and education. Most families have too much of one and not enough of the others with the too much component being debt.
Here is what I would recommend. The first item is to back away from your financial plan and take inventory of the assets you have saved and earned to date. I would then start to raise cash so that you have money set aside for a rainy day. A cash reserve will also help reduce your dependence on debt. A suggested amount to hold in cash is 3 to 6 months of your household expenses. If your family expenses total $5,000 per month, then your savings goal should be $15,000 to $30,000.
The next item I would pursue would be your retirement accounts. With retirement, you want to make sure that you are maxing out your company retirement plan contribution. For most people this means contributing $18,000 to your company plan ($24,000 if you are over 50). You can also max out your IRA account with an annual contribution of $5,500 or $6,500 if you are over the age of 50.
The third item is debt. Debt is a four letter word and should be eliminated as soon as possible. The high interest rate, non-deductible debt such as a credit card or auto loan should be targeted first. How much debt is too much? Your debt limit should be no more than 38% of your total household gross income. If you household income is $10,000 per month, then your total monthly debt payments should be $3,800 or less.
Last, fund little Johnny or Suzy’s education account. Your offspring can always get a loan or scholarship for college. You will not be able to get a loan or scholarship for retirement. I know this is a kick the can down the road recommendation but you need to take care of your house first before you can help others.
Finally, do not worry about your current state of financial affairs. As long as you know where the leaks are you will be able to plug them up over time especially if you have a solid financial plan.
“Therefore I tell you, do not worry about your life, what you will eat or drink; or about your body, what you will wear. Is not life more than food, and the body more than clothes? Look at the birds of the air; they do not sow or reap or store away in barns, and yet your heavenly Father feeds them. Are you not much more valuable than they? Can any one of you by worrying add a single hour to your life? Matthew 6:25-27
Bill Parrott is President and CEO of Parrott Wealth Management in Austin, TX. www.parrottwealth.com