Chances are you spotted some cute little skeletons dressed up for Halloween that didn’t give you too much of a fright on Tuesday. But, there may be some others that should be cause for a great scare.
Even one pesky financial skeleton lurking in your closet could impact your financial security, so we’re taking a look at six financial skeletons that it’s time to clean out immediately.
The paycheck to paycheck pendulum
No matter the level of your income, the paycheck to paycheck pendulum can loom over anyone, ready to knock you off track at any moment.
Do you find yourself spending everything you make each month, or perhaps even more than you bring in? If an emergency came up, how would you cover it?
If you can’t think of a way to cut expenses, then you might need to step back and evaluate what you view as “necessities.”
Tips: Track your spending for a few months to get a fairly accurate snapshot of what you spend, and don’t forget those payments you only make once or twice a year.
Determine if there are luxuries disguised as necessities, break each item down into needs vs. wants, and create a budget that works with your income. Include room in your budget for savings and work toward building an emergency fund of at least three months of living expenses.
The U.S. Census Bureau data shows that the average American household owes more than $16,000 in credit card debt. Combine that with student debt and mortgages and we see that debt really may be suffocating some families.
Tips: Determine your net worth, check your credit report, decide to not take on any additional debt and create a repayment plan. Don’t forget to tell someone about your plan for an added incentive to stick to it.
Avoiding the retirement monster
Employees have come to expect a good 401(k) plan as part of their benefits package when they take a new job but not everyone takes advantage of this benefit.
Most Americans will have to fund their own retirement or at least contribute significantly to it but aren’t saving enough to cover their future needs. Do you have an idea of how much it will cost you to live in retirement each year?
Tips: Ask your human resources representative about the maximum amount of money that you can put into your account each year. Also inquire about how much you have to contribute to receive an employer match and save at least that much in your 401(k) account. Consider an Individual Retirement Account or other savings/investment vehicle.
Estate planning cobwebs
Estate planning is a way for you to think about the legacy you would like to leave your loved ones and also lays out things such as who gets your property when you die, the wisest legal transfer methods for leaving your property, who will provide for your young children and who should make medical and financial decisions for you if you are incapacitated.
People avoid estate planning because they think they lack time, don’t understand where to start or feel their estate is too small. Others start the process but get into trouble by not keeping documents updated to reflect the current status of their family and wishes.
Tips: Work with an estate planning attorney to get your affairs in order, make sure someone knows where to find the documents and then review your plan every five years, at a minimum. Major changes in your life should warrant a fresh look at your documents.
As baby boomers age, more and more of our nation’s elderly are finding themselves in need of either home care or a long-term care facility. The cost of long-term care can be astronomical and could range from approximately $30,000-$70,000 a year or more depending on the needs. So if you need some type of long-term care, how can you expect to pay for it?
Tips: Long term care insurance is not right for everyone, so work with a professional to determine if there is a need. They can help you wade through the choices of waiting periods, benefit costs, inflation, length of coverage and other options.
Lack of planning
Many of the skeletons we exposed above would be addressed if you had a proper financial plan in place. A financial plan should not just be about money but should also address insurance and estate affairs so that your entire financial puzzle adds up to a complete picture.
A certified financial planner professional can help coordinate multiple components of your financial plan and utilize a process to help you establish your personal and financial goals. Other advisers that might be on your planning team could include a certified public accountant, estate planning attorney, insurance professional and personal banker.
Marc C. Shaffer, CFP, AIF, EA, is Principal of Searcy Financial Services, Inc., a fee-only registered investment advisory and financial planning firm located in Overland Park.