WHY IS FINANCIAL CONTROL SO IMPORTANT?

Personal Finances is often the broad term used for managing your money and planning for the future. As a financial advisor I referred to a snapshot of someone’s various financial components as their Current Financial Situation. In a recent podcast interview on Financial Literacy my guest referred to this as “knowing where you stand”. Regardless of what you call it, it is difficult to make good financial decisions and achieve your financial goals without some basic financial knowledge.

Where do you stand financially?

This is your starting point. Do an inventory of a) what you have (your assets) and of b) what you owe (your liabilities). Assets minus Liabilities equals Net Worth. Your net worth reflects where you are financially at the moment. You want your number to be positive (more assets than debt) and you want your net worth to be growing over time.

You also need to know how much is coming in and how much is going out, so you have a sustainable spending plan (budget). Think of this as a reality check. If you don’t know where you stand you cannot make informed financial decisions or track your progress.  This leads to stress and that nagging feeling of not knowing whether you are going to be OK or not.

How do you get there?

Reesa used a big picture workbook she created for her financial literacy courses. I have a simple budget form as part of the Lady Money Personal Discovery Workbook for creating a thoughtful spending plan. But you can also use paper & pencil, computer spreadsheets or online budget apps. You don’t have to get it down to every latte either – a rough idea works fine.

The reason writing it down is important is that most people think of saving after the fact. Seeing if there is something left makes achieving saving targets a less than assured outcome. It is also more likely that you will spend indiscriminately rather than thoughtfully as part of a prioritized plan.

How does Social Security fit in?

For many of us Social Security represents a sizable portion of our retirement income. And the inflation adjustments your benefit will receive makes it especially valuable. It is important to be on top of several aspects. One – just as you should know your net worth you need to be aware of your estimated Social Security benefit. You should also periodically check that any annual earned income is properly reported so you get your fair due.

It is also a good idea to get a professional opinion on when to claim benefits. 40% of women claim their Social Security benefits at the earliest possible age (62) even though it means a reduced benefit for life. Sometimes there are good reasons such as health issues or cash flow needs. But in many cases, it is because women don’t really understand their options. Social Security does not give advice so if you are not knowledgeable you may construe a conversation on the process as encourage to take a benefit. I also think people underestimate their life expectancy. Many of us have health issues after age 60 but it doesn’t mean we won’t persevere and live a long life.

What else do you need to know?

You need to put it all together to make sure you have enough in retirement. Your net worth tells you if you are on track. Your spending plan (budget) ensures you hit your savings target and your spending is thoughtfully in alignment with your personal values.

Your estimated Social Security benefit is part of the equation in determining if you can continue your current lifestyle after any earned income stops. Roughly you take your current annual budget and subtract your estimated annual Social Security benefit (and any other income you are expecting). What is left needs to be covered by your investment portfolio. There is some debate on this but for broad brush purposes expect to be able to withdraw 3-4% a year from your investments. If you come up short, you will need to increase your savings targets. You may be fortunate enough to receive some sort of inheritance but as a financial planner I usually didn’t count this because there are no guarantees.

You may want to consider hiring a financial advisor to create a comprehensive financial plan for you. They will be more thorough and may have options you haven’t thought of. They can also help you decide when to take Social Security during that transition between stopping work and claiming benefits. The best choice is not necessarily intuitive.

Getting “Your House in Order”?

This is about more than money. Just as you plan for replacing your income when you retire you need to plan for when you can no longer care for yourself. You need to plan for when you die. Many people don’t like to talk about this, much less address it. So, I will just say that an important part of financial planning is estate planning. Because I can tell you from personal experience, it is much harder to deal with this during a difficult life transition or after a profound loss.

Once you “know where you stand” you will find it easier to make thoughtful spending choices, be more motivated to save for your future and have a better idea of what your financial goals need to be. Financial success is more about having a big picture plan that is appropriate for your particular financial situation and in sync with your life goals than having down every single detail.

Resources…

Reesa Manning Interview https://lady-money.simplecast.com/episodes/take-financial-control-an-interview-with-advisor-reesa-manning