This past summer, my wife and I faced an important decision: where to spend a much-needed summer vacation. Especially since it was the first time we’d have our infant son along with us—this time we had to think a little differently about our ideal escape.
The decisions we had to make piled up: What kind of trip did we want—active or relaxing? What was our budget? Did we have the time or inclination to do the vacation research on our own? Did we need a travel agent’s help?
Even after we settled on a week in a rental on Long Beach Island, New Jersey, we found ourselves wondering about a number of other factors, some outside our control. For example, how might a questionable weather forecast affect our plans?
Although considering some specific “what if” scenarios helped us prepare effectively, other hiccups cropped up that we couldn’t have foreseen—like last-minute adjustments to our plans for pet boarding and car problems.
In spite of these minor glitches, the week ended up being a perfect, affordable, and relaxing vacation for our family. But the experience made me wonder, if going on vacation requires this much planning, how do any of us plan for bigger financial goals like retirement, education savings, or health care expenses? Even after we make decisions in these areas, many unknowns can come up along the way.
Thankfully for all of us, it’s possible to have a sound plan in place that accounts for these risks and allows for needed flexibility when events threaten to push us off course.
Start by asking the right questions to define your goals
Successful financial planning isn’t just about the numbers: your retirement age, ideal investment return, or target portfolio balance in the kids’ 529 plans. Maybe you’re doing a great job saving and thinking about your time horizons but need a little help defining the more intangible aspects of your goals.
Here are some questions you can ask yourself:
- What’s your vision for each objective, and why is it important to you? For example, how do you hope to spend your time in retirement when you’re no longer working 40–60 hours a week?
- Who are the important people in your life, and how will these relationships affect your choices about when and where to retire?
- How important is it to give back to your community and family with your time and/or wealth?
These are just a few examples, of course, and the questions you should ask yourself will vary depending on your goals. When in doubt, try the classic “who, what, when, where, why, and how” approach you learned in elementary school to get the juices flowing.
Prepare for contingencies and remain flexible
My boss likes to use the phrase, “There’s no such thing as a financial planning emergency.” What he means is that we can—and should—plan for many of life’s unexpected turns in advance. Here are some common risks and tips on how to prepare for them.
- Market risk. This is the risk that market ups and downs will affect the value of your investments. You can minimize (but not completely eliminate) this risk in your investment portfolio. If your asset allocation matches your time horizon and risk tolerance, the effects of market ups and downs can be less dramatic. For example, it generally makes sense to invest the money you plan on spending in the next 2 or 3 years, such as a down payment on a house, more conservatively than retirement assets you won’t use for another 20–30 years.
- Protection planning. A great way to manage a number of different types of risk is through insurance. In your financial plan, insurance policies play defense while your investments play offense. For example:
- Life insurance can give you peace of mind that your loved ones will be able to pay off debts and meet their own financial goals when you’re gone.
- A disability policy can help bridge an income gap while you get back on your feet if you get injured on the job.
- The right health insurance can help you manage costs for both routine and unexpected medical expenses.
- An umbrella insurance policy can help protect your hard-earned savings from a lawsuit—whether your dog bites a neighbor or a contractor slips and falls on your property.
Whether you’re still growing your portfolio or are getting ready to spend it, make sure to protect it along the way!
- Emergency planning. For truly unexpected events—loss of employment, a sudden change in health care expenses, emergency home repairs, or other unpleasant surprises—a fully-funded emergency fund is a very effective way to bridge the gap between your income and expenses. Although the ideal amount is 3–6 months’ worth of “nondiscretionary” (or critical) expenses in a cash account (e.g., a money market, bank, or savings account), any amount you can set aside is better than none. In an emergency, it’s better to “pay yourself” from an account like this than to pay interest on a credit card or loan, or extra taxes for a retirement account withdrawal.
Make a disciplined plan for how to get to your destination
When planning our vacation, asking ourselves the right questions and making the necessary preparations helped. We could easily have spent too much time thinking about the unknowns and gotten stuck in “paralysis by analysis” mode, reducing our enjoyment of the process and the result. But instead, we found what worked for us, planned for what we could, and accepted that we were probably going to have to make a change or two along the way.
Whatever tools and assistance you use to pick an appropriate balance of diversified investments, monitor them over time, and track progress toward your goals, make sure they’re the right ones for you. There are a wealth of online resources available to help you do it yourself. Or if you think you’d prefer the guidance of an expert, consider working with a financial advisor.
You’re probably already traveling in the right direction, so don’t get discouraged when thinking about the “what ifs.” A long time ago, I heard someone say, “Getting there is half the fun.” I hope you enjoy your trip!
All investing is subject to risk, including the possible loss of the money you invest.
Diversification does not ensure a profit or protect against a loss.
Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.