By Daniel D. Wolfe
One of the classic comedy movies of the last 30 years, Vacation, is about to hit the screen again but this time it is the son of Clark Griswald, Rusty, who is taking his family to the mythical Wally World.
Most people found humor in the movie due to the old “been there done that” feeling. Making and preparing for a trip, as in the movie, includes detailed preparations, ups and downs and many unexpected moments.
Like a trip, financial planning is a life-long event that takes us from the early years of adulthood into retirement. While the ups and downs in the movie make us laugh, these same events in reality are not so funny if we are not prepared.
Here are four major elements of a roadmap for this journey called Life.
We are ready to go so what now?
Our family has made several trips to visit the Great Mouse in the South and the journey was easy to start because we began from home. But in the world of finance, most people do not know where home is or the starting point of the trip.
I have always recommended the preparation and maintenance of a personal financial statement. The first part of such a statement lists the things we own, called our assets, and the value of those items. That would include bank accounts, investment accounts, real estate holdings, retirement accounts, personal autos, cash value of life insurance and anything else of financial value.
The next part of the statement is the listing of what we owe, or liabilities. These may include mortgages, auto loans, student loans, credit card balances and other debts.
The difference between these two items, assets and Lliabilities, is your net worth. It should be our intention to always keep that number positive.
This calculation gives us our starting point for the trip. While on our trip, we should compare the changes in our personal financial statement from time to time to see if our financial resources are increasing.
Do we have a vehicle that can take us where we want to go?
My wife always chuckles when we get ready for a trip. I change the oil, inspect the tires and belts and of course perform the official waxing.
I want to make sure our car can make it to our destination and keep us secure and comfortable along the way. We cannot achieve this without understanding and controlling our vehicle.
Financial planning presents us with the same issue and to help us we will need to prepare a budget. A budget details how we allocate our income to make sure we stay on the roads that will get us to our destination. Think of it a financial GPS.
Budgets can be sophisticated or simple, written in detail or summarized carefully. We all have a tendency to be surprised where our money is going upon examination, but we should not live with those surprises.
Our budget should detail our sources of income, at least monthly, and where our expenditures are going. We should always plan for normal living expenses and savings for anticipated needs.
You can find some simple budgets and many financial tools in our website’s Financial Tools section. Budgets are critical to any financial plan
Did we pay our AAA bill this year?
Flat tires, breakdowns, toll roads, bathroom breaks and other unexpected things can disruptour vacation.
When preparing a financial plan, we need to reduce our risk of encountering the unexpected, like an unplanned (but welcomed) baby, a lost job, a sudden sickness or worse.
Risk-reduction strategies like buying insurance, accumulating extra savings and so forth can inhibit our enjoyment of life. But inadequate risk mitigation can be catastrophic.
Part of our plan should be identifying our risk and determining the best way to protect ourselves while not spending everything we have to do so.
Hey! I forgot to ask, where are we going?
We know where we are starting and we have the roadmap, but where are we going?
In the late 1990s and most of the 2000s, I would jump on my motorcycle with my friend and our adult sons and take a 4-6 daytrip. Our trip plan would be as simple as “Let’s go South,” or “East”… you get the point.
It would be nice if life was so flowing, but it isn’t. We need to define where we are heading because it is not pleasant to accept an unplanned destination that is not in any way, shape or form what we had hoped for.
In planning for retirement, we need to understand what it’s going to take in the form of pension benefits, self-funded retirement plans, investments and Social Security to meet our anticipated cost of living.
Income and expenses are different during retirement. Where we have mortgage payments now, we will have potentially higher medical cost during retirement. Meanwhile, whereas our current income may include annual pay raises, retirement will likely bring a fixed income. Moreover, the estimated return in our investments may not be what we had hoped for.
Our destination must be defined as much as possible and adjustments to our current living and adjustments to a different, more affordable destination may be required.
I hope and pray that each one of you plan well, live long and enjoy the trip.
Dan Wolfe is a partner at Byler, Wolfe, Lutsch & Kampfer. He can be reached at 330.385.2160 or DWolfe@bwlkcpa.com.