If I were to distill Financial Planning down to its core, it is ultimately the concept of helping to ensure that your financial goals are accomplished. In other words it’s giving you the highest possible chance of accomplishing your goals. So when constructing a financial life, there’s one very useful question that needs to be asked: “What could go wrong?”
Starting from square one, what are the basic things that can derail you financially? Fundamentally it’s cash flow and your budget. How much comes in, and how much goes out. These are the building blocks, and a disruption here can throw you off track. Income going down (e.g. job loss) and expenses going up (e.g. car repairs, furnace goes out, etc.) can force you down the road of leveraging things like credit cards to make ends meet, or at the very least creating a lot of stress. That is unless you have a healthy cash reserve. That’s why building a cash reserve or “emergency fund” is one of the first things you should consider doing when putting your financial house in order (the generally accepted guideline is to have three to six months worth of your normal monthly expenses).
Let’s say you have that cash reserve built up, what else could go wrong? Well, if you have a more permanent loss of income, or a more major expense then you could be in serious trouble. The impact of some things can be so dramatic that we don’t really want to bear the risk ourselves. This is why insurance exists, so we can transfer risk off our books. Some people don’t like insurance, but it serves an important function. If you want to ensure you reach certain financial goals, you may need to review whether you can insure against certain risks.
Okay, so if you have good cash reserves and adequate insurance, what else could go wrong? At this point you’ve protected against most of the bad things that happen to you, but you haven’t yet done much to push yourself forwards towards your goals. Things like retirement, your children’s college, buying that vacation home. These are the fun goals, but things can go wrong. At its simplest, the risk is that you don’t accumulate enough money to reach the goal. How much you’re saving and how much risk you’re taking in your investments are important factors, especially for retirement. You can borrow money for college, and you can adjust your lifestyle goals, but failing to plan for and pay attention to your retirement puts you at risk of depending on others, whether that is society at large (social security) or friends and family. After you’re on track for retirement, then you can turn your attention to other “nice to have” things like paying for college or spending on other wants.
What else could go wrong? Is your estate planning in order? This covers not only wills, but possibly trust planning to better manage and pass your estate to the next generation. Also, power-of-attorney relationships to make sure someone you trust is empowered to act on your behalf if you’re unable to do so (both financially and medically).
What else? You could be wasting money or missing opportunities. Are you spending more on taxes than you need to be? Are you investing properly? Mishandling these kinds of things can mean the difference between a highly successful future and one full of wasted opportunities.
Consistently questioning “what could go wrong?” is key to building a solid financial foundation. Navigating each of these topics successfully is important, and having a trusted advisor can take a great weight off your shoulders. But if you want to go it alone, it’s a good place to start. What could go wrong?