Three Ways Financial Plans Can Help Save You from Yourself

You know it as well as I do. Way too often we find that we’re our own worst enemy.

And things only get worse when we need to make a quick decision when we’re stressed or hungry (literally or figuratively). That’s why crafting plans is so crucial. It lets us consider all options dispassionately, when they’re still hypothetical, compare pros and cons, and choose the one we think will give us the best results.

This is true for most things in life, but it’s especially important in personal and business finance.

When it Comes to Your Personal Finances, Do This First

I’ve yet to meet a financial pro who thinks an emergency fund is a bad idea.

Yes, there are arguments regarding how much you should put in this fund at what point, or where you should park the money, but I have yet to see a financial pro argue that you shouldn’t have an emergency fund.

Here’s why.

Imagine you’re living paycheck to paycheck. Then, suddenly your car breaks down and you have to spend over $1000 to fix it since you can’t afford to replace it and can’t survive without it. Or your kid needs emergency dental work to the tune of $500. Or your roof starts leaking and you have to replace it. Bye-bye $4000!

Frankly, those aren’t really emergencies. They’re just life happening.

A real emergency could be if you have to go to the hospital for five or six weeks, and only have a couple of weeks’ worth of paid leave. Here, you’ll owe many thousands (or tens of thousands) of dollars, and you’ll lose three or four weeks’ worth of pay.

Or perhaps you’re laid off and it takes three or four months to find another job, where it’s not at all clear if you’ll make the same salary. Yes, you’ll receive unemployment benefits, but those are nowhere near enough to cover your regular bills, let alone the suddenly expensive health insurance.

I know, because that’s what happened to me back in 2010. And I didn’t find another job, I started a business, which took several months to find paying work and get paid. This while my health insurance changed over to COBRA coverage, to the tune of $1500 a month!

Lucky for us, we had enough savings to tide us over without losing our home or car.

If you don’t have any emergency savings, you’re not alone. According to BankRate, only 44 percent of Americans would be able to cover a surprise cost of $1000 out of savings, and only another 15 percent expect to be able to cover it by reducing other spending.

What happens if you’re among the other 41 percent? Your options are to borrow or suffer dire financial consequences, such as losing your home or car or potentially facing bankruptcy.

If you borrow, it would most likely be with a credit card. That at least gives you up to a month to come up with the money to pay it off, but if you can’t, you start paying interest rates of more than 20 percent! If you pay only the minimum of, say, $25 a month against the $1000 debt (assuming you use a separate card for normal expenses), you’d need nearly six years to be done, and would end up paying over $700 interest!

And that’s just $1000, which is almost guaranteed to happen over the course of a few years. What if it’s $10,000? Now we’re talking over 33 years and more than $42,400 interest! Dropping into such debt can devastate your finances.

Facing this kind of emergency, what would you do?

This is where planning ahead can help. A lot.

Think about what you could do to cover a sudden and critical $10,000 expense. For most truly critical things, you can probably buy insurance. This is where health insurance, auto insurance, and renter’s or homeowner’s insurance can save your finances.

Or having a large-enough emergency fund, like we did.

Darryl Lyons, CFP®, Chief Executive Officer, PAX Financial Group says, “If you can squirrel enough money away for a rainy day, when that day comes (job loss, car repair, etc.) you can avoid shifting into panic mode.”

The Biggest Financial Plan of Your Life

If you live paycheck-to-paycheck, it’s almost a given that you can’t really think about the future, because the present is sucking up all your financial oxygen.

But if you’re above that mark, you’re probably still not saving very much. According to the most recent data from the St. Louis Fed, Americans’ average annual savings rate dropped to 4.4 percent in April 2022. This after years of hovering between six and seven percent until the pandemic hit, and then spiking up to 24.8 percent in May 2020.

The US Census Bureau says that even for Americans approaching retirement age (55 to 66), 50 percent of women and 47 percent of men have no personal retirement savings, and even including non-personal savings, 40 percent of women and 39 percent of men have no retirement savings at all!

And it isn’t just low earners. It includes many high earners who simply allowed their expenses to soar along with their incomes, buying bigger homes and fancier cars than they need, sending kids to expensive private schools, taking expensive vacations too frequently, etc.

How would you like to live (figuratively) like a king as long as you’re working, but then face the choice between continuing to work until you die or retiring into poverty?

The best way to avoid lifestyle inflation in the present from killing any hope you may have of eventually being able to retire is to plan for it.

Ayad Amary, MBA, CFP®, VP, and Senior Wealth Advisor at Wealthcare of the Lehigh Valley says, “The real value in planning is that it reduces the temptation of spontaneous decisions or knee-jerk reactions. It is an intentional, well-thought-out process where you take the time to articulate your priorities and define how you’ll achieve those. Once you have that foundation, it often reduces the stress associated with the unknown. Working with an advisor or financial coach helps you stay accountable in implementing your own plan. After all, a plan is only an imaginary idea unless executed upon and brought to life.”

As the famous saying goes, “Failing to plan is planning to fail!”

How Planning Now Can Save Your Income Later

When you’re desperate for money, you have few choices.

• You may be forced to take a pay cut or cut your rates to the bone (if you own a solo practice)
• You may have to work for a jerk of a boss or provide services to jerk clients
• You may be forced to accept work that doesn’t interest you, and doesn’t let you benefit from your education, skills, and experience

Planning can save you from these miserable experiences.

If you’re a solo professional or entrepreneur, taking these and similar actions now can help your business survive:

• Market and network during good times too, so your client traffic stays robust
• Craft a low-cost marketing plan for when, not if, traffic slows down anyway (e.g., content marketing, networking with professionals who share the same clients with you but provide them complimentary services, pursuing speaking opportunities, etc.)
• Create a bare-bones business budget that cuts all the fat, so you know what to cut when revenues drop

If you’re an employee, doing the following and similar things will likely reduce your layoff risk, and improve your chances of landing on your feet if you’re laid off anyway.

• Take on business-critical roles at work, so your boss considers you indispensable
• Similarly, find ways to help your boss with her critical tasks, again, so you’re the last to get laid off
• Keep your skills resume, and networking up to date, in case you need to find another job in a hurry
• Provide value to others, including colleagues working elsewhere, so when you need help, they’ll be eager to repay your kindness
• Find a way to create other income streams, whether through an after-hours hustle, or investing in, e.g., rental real estate

The Bottom Line

As humans, we tend to act as if what’s happening now will continue forever, for good or bad. If you’re doing well now, financially, you probably aren’t paying much if any attention to preparing for future changes. In this, we can be our own worst enemies.

The above looks into three arenas in personal- and small-business finances that can devastate your finances, and what you can do now to help you weather unexpected and unwelcome changes. But those aren’t the only areas where planning can help. Alexis Woodward, CFP®, CDAA™, Co-Founder and Wealth Advisor at Blend Wealth points out how this extends beyond the financial, “Prioritize date nights before you hit a hard season in your marriage. Pour into your children now so you have a strong relationship and can influence their lives as they grow older. Work out before you’re out of shape.”

She then adds about financial matters, “Get a financial planner and have a financial plan in place before you’re behind the financial 8-ball. The best time to take action is before trouble starts. We’ve unfortunately seen too many people who thought they were invested in the stock market, only to find out years later they were invested solely in very conservative bond and cash funds with little to no growth.”

Are you ready to enjoy life more with less money stress?

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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.