First off, I feel very fortunate that thus far I am still a few degrees of separation away from people who have come down with COVID. The health crisis is an ongoing tragedy unfolding and I continue to hope that we can collectively do what it takes to make sure the fewest number of people are physically affected as possible. One very stressful realization early in the outbreak was to think about who would care for my three young children in the event both my spouse and I contracted the virus. This is just one of many concerns that can be addressed with comprehensive financial planning.
The economic turmoil that is currently spreading is troubling to watch.
I imagine everyone knows someone who has had a sudden and significant loss of income. I have close friends who are business owners who’ve had to lay off the majority of their employees and others who are out of work independent contractors who have taken on frontline gig work to supplement their lack of income. Both my wife and I have been furloughed; she as a preschool teacher and I from my weekend, part-time job. I truly believe that had we encountered these health threats and economic obstacles a year ago, I would be beside myself. However, in May of 2019, my wife and I had our first financial plan delivered. Although it couldn’t predict that a global pandemic was less than a year away, nor could it tell us that unbeknownst to us, we were a few weeks pregnant with our third child at the time, it undoubtedly set us down the right path toward financial wellness that today is yielding a tremendous amount of anti-anxiety dividends. Here’s how…
Financial Planning helps alleviate long-term, future-focused stress.
As we are still around 30 years pre-retirement, for me and my wife, one of the most important parts of our first financial plan was to get a general overall idea if we were on the right path to meet our goals or if they were completely unrealistic. Our probability of success as measured by the financial planning software was higher than I thought it might be. Knowing that our goals were not unobtainable was an immediate comfort, but being toward the bottom of what planning software defines as the “Zone of Confidence” made us realize that our future financial wellness was not guaranteed and would require hard work and determination to ensure its feasibility. Knowing where we currently stood provided a dose of reality and helped us better understand that we are active drivers in enabling our financial success.
Financial Planning helps relieve the fear of the unknown.
It was nice hear that this probable suitable outcome for our future selves was not an idealized, best-case scenario. It was the average of thousands of market simulations, including some pretty bad ones. These simulations showed us that any one economic climate was probably not going to make or break our future. Equally important was the planners dispelling our fear that not immediately adhering strictly to the plan was going to derail our future. This is especially comforting in the current perilous economic climate. For those who are still fully employed and remain so throughout the COVID crisis, your portfolio and net worth might be affected substantially in the short term, but you will be much better off if you continue to save, invest, and head down the path toward financial wellness once it is all over.
Financial Planning helps with your savings prioritization indecisions.
Working alongside both financial planners and clients who are conscientious savers, I know that the only way to have the financial future you want is to spend less than you make. But even when we got to the point where my wife and I had excess earnings, it was difficult to feel validated in our money saving actions. It was impossible to know if our decisions were making the most of our savings. Should we be saving in employer plans by increasing our pre-tax contributions or max out Roth IRAs with after tax money? Do we really need an emergency fund, or can our investment portfolio be our emergency reserve? One of the most helpful items we received from our plan was a detailed personalized savings strategy tailored to our income, expenditures, and specific access to employer retirement plans, all of which was expanded over the next few years. It showed us what we were currently doing, where we should refocus our attention in the short term, and then where to head long term. It was also reassuring to know that these savings strategies were analytically optimized, tested with long-term goals in mind with conservative assumptions. Ultimately, we were urged to work on an emergency fund in the short term at the expense of some retirement contributions.
Financial Planning helps you build your safety net.
After a year of making our emergency fund our priority, my wife and I are close to our desired target. Boy am I glad that we have been building liquid savings over the last year! It felt weird to hold money that yields little interest, especially after a 10-year runup in the market. When the market has gone up for your entire adult life, this was the ultimate test of a recency bias. There is also continued temptation to either invest all that cash as it builds up or use it toward a home improvement or another big-ticket item. However, COVID-19 is the perfect scenario to show why everyone should build an emergency fund and keep it funded.
The situation that is unfolding combines a significant and sudden drop in the global markets with an abrupt change to the job environment and to the income of so many people. Having an emergency fund in these unprecedented times, even as my family has had a change in expected income, has provided more peace of mind. No one wants to have to use their emergency fund and we are working hard to avoid it, but we also know that we built it for this exact reason and the alternative is even more daunting. If you don’t yet have an emergency fund and find yourself economically unscathed thus far, start building one today. You won’t regret it.
Our plan identified quite a few financially related shortcomings, even those we had not thought about, and provided prioritization on which to address first. Two of our highest priority action items were to set up an emergency fund and to obtain estate documents. I already detailed how important the emergency fund has been for our stress levels during COVID-19. The other recommendation to get our estate plan established has proved equally important during this health crisis. Although we have managed to stay healthy so far during the pandemic, we have not taken for granted the fact that infection is still a possibility. When you have three young children, it makes coming to terms with the prospect of contracting the illness even more worrisome. Knowing that we have already worked with an estate attorney, who helped us think ahead about difficult circumstances, has provided tremendous reassurance. My wife and I have already had the difficult conversations regarding who would care for our children if we were incapacitated, who would make medical decisions for each other if the other wasn’t able to, and who would take over our financial responsibilities for us if needed. We have signed all the documents and notified all those who we have selected to be our fail safes should we need them. I could not imagine anything more stressful than being unsure of what might happen to you or your children while fighting an illness that can quickly leave you without the ability to care for yourself.
Financial Planning continues to help provide a roadmap to minimize my financial stress.
As we continue to revisit our first financial plan and begin to check items off our action list, we realize that we still have a lot of work to do. We also now better understand the real-life implications of continuing to strive toward financial wellness. The first two action items we have tackled have already proved themselves invaluable and well worth the investment, especially highlighted during these trying times. The current climate has forced all of us come to terms with a tremendous loss of control in so many aspects (including financial) of our daily lives in such a short amount of time. It continues to be helpful to have a list of top financial priorities helping us not lose sight of those areas of our financial life that we still control and can choose to focus on.