Lessons Learned Part 2

Lessons Learned Part 2

Have you ever had one of those reality check moments. You know the kind. You're driving down the interstate having a great day, listening to your favorite tunes, its sunny, everything seems great then you look in the rear view mirror. Your brain finally engages that the flashing blue and red lights are not because you just won the American Idol vehicle solo competition. You could swear you were abiding all known automotive rules and regulations (or at least most of them anyway). Of course you were only going 60... then officer shiny shoes proceeds to articulate that you were actually traveling at a velocity in excess of 79.5. He gives you some paperwork designed to lighten your wallet a couple of C notes. Basic reality check.

What does this have to do with the financial meltdown over the last few years you ask? Reality checks come in many different forms. How many of us have had a major reality check when it comes to our retirement planning, investments, family budgets, or mortgages over the previous year? Were you like most, driving down the road at what you swear was 60? You had the latest and greatest emerging markets funds, plenty of cash to spend (courtesy of your every increasing home value), and an interest only mortgage that would reset at the perfect time just when you receive that big raise at work. Then you saw the blue and reds.

At one time or another this has happened to all of us (unfortunately for me a few more blue and red moments than I would ever admit). When we push the financial envelope (or any other activity for that matter) at some point there will be an inevitable financial reality check. For example, you knew you hadn't saved enough for retirement but yet you still pushed those risky small cap investments to eke out just a little more yield. Then before you can say boo, small caps are down 50% and you just added 10 years to your retirement date. Sound familiar?

So how do we prevent reality checks from turning our financial world upside down?

Step 1- Call a duck a duck. Markets and economies go up and down in predictable patterns. When your financial life seems like easy street don't be arrogant enough to think that it will last forever. On the flip side, negative Nellie does not last forever either. You must play what is. If you have not saved enough for retirement, if you are spending beyond your means, if you are not protecting your downside (read insurance) etc. you are at risk of a major financial reality check.

Step 2- Take the time. Realize with just a little time and effort you can make big improvements. Studies have shown that the richest 10% of our population spend less than 10 minutes a day on personal finance. So come on, get off your Facebook page and put down that texting device and let's roll up our sleeves and get to work. First we need to develop a budget. Spend some time tracking your expenditures, so that you will understand your spending trends. For some help on a down and dirty emergency budget check out Lessons Learned Part 1. Next identify your biggest risks. Common sense can help in this area. For example you say you have 5 small children and a $50,000 life insurance policy. Common sense would say this is not even close to enough life insurance. How is anyone going to take care of your children's needs for years to come on $50k? You have 5 years till retirement and $250,000 in your retirement accounts. Common sense says that you need to save much more. What happens if you live to be 95? Do you think that being in retirement for 30 to 40 years with $250k is enough? Quantify your risks in the areas of retirement planning, estate planning, property casualty, life, disability, and health insurance etc. And make a plan to mitigate your risks as much as possible. Seek out professional advice if needed.

Step 3- Take action. Put a plan together and take action. When I say put a plan together I don't mean spend a bunch of time to develop a plan which is put on a shelf to collect dust. Be proactive and take some action every day until you have completed all of the tasks necessary for success. Do whatever it takes to make your financial plan a priority and complete the tasks required to make it a reality. Cut your spending, reduce your debt, save more, protect you and your family, live the American dream.

Taking action on these three steps may not keep officer shiny shoes out of your rear view mirror but at least you will have enough scratch (read money) to cover your next financial reality check. Please feel free to email me your thoughts, comments or questions.

Until next time…be Cents Able.