Mike Tyson said, “Everybody has a plan until they get punched in the face.” I love that quote for a couple reasons:
- It’s Mike Tyson and when he speaks, it’s usually quite entertaining.
- It’s extremely accurate – with the caveat that not everyone has a plan.
We all have times in our lives when we get figuratively punched in the face. Life throws plenty of curve balls, and some require changes or adjustments to your financial plan. Let’s look at a few instances where it makes sense to adjust:
- Pay raise – Don't think of your new raise as a license to spend freely. While you certainly should enjoy your hard‐earned pay bump, you need to do so within the confines of your plan. We recommend people use the budget TSL (Taxes, Savings, Life). If you're using this budget you'll automatically raises both your spending and savings amounts. A raise may mean you need to contribute more to your 401(k), but it could also mean that you will hit your annual 401(k) max, in which case, you’d need to find other avenues to save like in a brokerage account or Roth IRA.
- Kids – It’s a given that life gets more expensive and your financial plan will change when you have kids. You most likely can't anticipate all the new additional costs you'll take on with kids, but you can at least anticipate a few and know where in your budget you can be flexible. Perhaps you'll want to add a college savings account, or maybe your cash flow will tighten so you can't save as much? Having some idea of what to expect will help you better handle those curveballs.
- Financial Setbacks – This is the most painful "punch in the face" to your finances. Whether it's a pay cut, job loss, broken down car or hospital bill, the reality is that many of us will face financial setbacks of some type in our lifetime. This is why we preach that everyone should have an emergency fund with three to six months' cash reserve.
- Retirement – This financial adjustment will most likely happen as you get closer to retirement. You might have planned and saved for an early retirement only to realize you can't image giving up your job, or you might be forced into early retirement for medical or other reasons. In either of these financial situations, you'll most likely need to make adjustments to either to your allocation, budget or both.
Then there are other times where you feel the need to make major overhauls to your plan when in reality, staying the course is the right call.
- Big Returns – Recently we’ve had a few nice years in the market with double digit returns, and we’ve had a few flat years. When markets rise, though, you can’t start acting like that will be the norm. At Wela, we often tell people to expect 6% ‐ 7% returns because it’s an average. Rarely will returns be exactly 6‐7%. This is where people can get into trouble with trying to time the market. Timing the market doesn’t get you 6‐7%, it gets you 2‐3% typically, and that's if you’re lucky.
- Major Purchase – When you have the urge to buy something expensive (home/car/boat/nice watch), it’s best to take a step back and be sure it fits within your financial plan. You might want to wait for a raise so you can incorporate the expense in your TSL budget (like we talked about earlier.)
- Emotional Career Change – Remember your job is arguably the most central piece to your financial plan. It’s the source of cash flow and often retirement benefits (401(k), 403(b), pension, etc.). Be sure you know the impact that a job or career change will have on your plan. It’s certainly okay to change, but be sure it’s well thought out and a part of your plan. In other words, be sure it doesn’t create an unanticipated change.
If you're going through any of the above changes, or maybe it's something that we didn't include, and you'd like a professional opinion on if it's time for you to adjust your financial plan, create a free Wela account to talk with our team. We love to help clients and users alike get their financial house in order.