By Bert Whitehead M.B.A, J.D. © 2012
Some days it seems like our economy is improving, then you turn the page and major world problems (Mideast, Europe, Korea, etc.) are just getting worse.
So what if you are a baby-boomer (or older) and are starting to think that your retirement isn’t going to be as joyful as you expected? Or maybe you are younger than that but wonder about your ability to take care of your parents, put your kids through college, and ever have enough money to retire yourself?
To evaluate yourself financially you need to answer four basic questions:
1)Are you living within your means?
2)Are you saving at least 10% of your gross income?
3)Are you covered for possible catastrophes in your life?
4)What is your ‘Plan B?’
You will note that these four questions have nothing to do with the worldwide currency crisis, the future of the stock market, or the political outcome of the next election. Instead, they refer to issues that you can directly control.
1)Are you living within your means? I have a short cut to figure this out. Do you pay off your credit cards in full every month? If you do, you are generally living within your means. If not, or if you have to take out loans (home equity, more credit cards, etc.) to pay off your credit cards, you are living beyond your means.
If the latter applies, you are probably spending more than your take-home pay and the shortfall shows up on your credit card. If you have tried to restrain your spending and have not been successful, it is usually because you have ratcheted up your standard of living beyond what you can afford. Being ‘house poor’ often causes this. That means that you have too much house, and to cut your spending you will have to downsize. Downsizing is much easier if you are relocating into another housing market.
2)Are you saving at least 10%? When we talk about ‘saving’ in this context, we are talking about long-term permanent savings, i.e. your investment portfolio. People sometimes emphatically assure me that they have been saving money regularly for years, but they have not accumulated an investment portfolio. They confuse ‘saving up to spend later’ with ‘saving for long-term investments.’
The financial objective of long term permanent savings is to invest enough during your working years so that later in life you can live off the money your money makes, rather than from the sweat of your brow. This is required if you are to be truly ‘free.’ Those without an investment portfolio are destined to have to work their whole lives, depend on the benevolence of others, or live in poverty.
3)Have you protected yourself against catastrophes? The best-laid plans can be derailed by unexpected calamities. Sudden medical conditions or disability, loss of car or home, unexpected death, lawsuits, etc. are all dangers than you seldom have to deal with, but they do happen and they can be devastating.
Basic insurance coverage and simple estate planning can shield you from these hardships. Although you might set these protections up, it is easy to forget about reviewing them. Then when you need them, they may be stale or inadequate. Make sure they are updated at least every five years, or whenever your life situation shifts (marriage, children, family deaths, etc.).
4)Do you have a ‘Plan B’? Even when people have done everything ‘right’ (i.e. #’s 1, 2, and 3 above), life can present unexpected challenges that they can never prepare for. Even with a college education, you will never be certain to have a job. You may take risks that flop, like starting a business. Shadowy medical conditions, like depression, might go unrecognized and can be debilitating.
For some younger people, Plan B is moving back with their folks. For some older people, Plan B is moving in with their adult children. Plan B might simply entail a willingness to drastically reduce your living standards so you can maintain your independence.
Sadly, my experience has shown me that many people live lives of quietly repressed panic, with an intangible sense of deprivation anxiety. They may not recognize it themselves, but a sense of financial foreboding shadows their lives every day. This can lead to behaviors like intense miserliness or as denial expressed by mindless spending. Others distract themselves by focusing on the possibility of widespread debacles due to economic and social issues. They spend their time playing “Ain’t it awful…” with their comrades in fear. They may overreact by radically altering their financial positions (“gold and canned goods.”)
I find that our present times have not changed much from past times. I recently saw the movie “The Iron Lady” which reminded me that we were dealing with the same issues 30 years ago as we are now. Somehow we, as a people, are able to rise up and defeat fear.
The real danger is not outside of us in the economy or the country. Our biggest danger lies within ourselves. We cannot control our individual destiny by anxiously reading the papers and watching TV. After all, magnifying the negative is much more profitable for journalists than reporting slow, steady progress.
Review your own situation and make the changes you need to make so that you can answer ‘Yes!’ to each of the four questions above. Then I can assure you, it is not time to panic!
I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY.