When You Should Adjust Your Financial Plan

Financial planning

Mike Tyson said, “Everybody has a plan until they get punched in the face.” I love that quote for a couple reasons:

  1. It’s Mike Tyson and when he speaks, it’s usually quite entertaining.
  2. 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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.

  1. 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.
  2. 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.)
  3. 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.

3 Options For Newlywed Money Management

marriage financial planning

A common question we receive at Wela is how newlyweds should deal with finances.

Perhaps one part of the pair doesn’t know how to have a conversation about financial matters with their soon-to-be spouse. She may love to buy shoes and he may love to save, or he wants his “boys weekend money” while she wants everything shared. What should they do?

In the early years of marriage, most couples have to learn to compromise and think, act and plan for "we" instead of "me," and that includes financial matters. Considering a large percentage of divorces happen because of money issues, clearly this piece is crucial to get right but something many couples have trouble agreeing upon.

There is not a right or wrong way to go about this, and it very much depends on the investment/savings personalities of the couple. However, the most crucial step that too many people miss is talking about their finances in the first place. It's important to be upfront about both of your saving, spending and investing styles so that you can then both agree upon a plan for how you want to merge your financial lives. You might agree on all financial topics which would make it easier when making financial decisions. You might not agree on any financial topics, in which case you might agree to keep your financial lives separate, at least for a time, while you both work on finding your financial middle-ground.

Related: Will Getting Married Hurt Or Help My Taxes

There are two key issues that are typically on the forefront of newlyweds’ minds:

What do I do with my/their old bank accounts?What do we do with “OUR” money?

How you answer the second question will help you answer the first. There are three possible outcomes for the second question:

  1. Completely Shared - You both share a single account with both your names on it where all cash flow goes into and all expenses are paid. Typically for this to work so that both spouses are happy, you must both have trust and faith that your partner will act responsibly and not hold the other liable for spending more than themselves.
  2. Individual Accounts & A Joint Account- You each have separate accounts where your paychecks are deposited, plus one joint account for some amount of fixed expenses. The shared fixed expense account would handle all joint bills while the separate accounts would be used at the discretion of the holder. Typically the amount each spouse contributes to the joint account is either based on the percentage of income each is responsible for in the family, or based on the percentage of expenses each is responsible for (this is much trickier to navigate).
  3. Completely Separate - You each have your own separate accounts and identify which expenses each spouse will be responsible for, thereby, keeping a black curtain over accounts completely and maintaining maximum financial independence.

We have seen all three options work. Most often, couples start with the second or third option and slowly migrate with more comfort to the first. Once you've decided how you want to handle your finances moving forward, it'll be easier to decide how you want to handle your old accounts.

Marriage is a learning process. When most people get married, they’ve barely figured out their own finances, much less built trust in how their new spouse handles their finances. To speak with an advisor about which options makes the most sense for you, create your free Wela account today.

How much should you budget for taxes, savings, and life (TSL)?

Here is some sobering news; when you add up the taxes you pay to the Feds, payroll, state tax etc. (not even including property, sales, gas, and ad valorem tax) – you’re probably paying more than 30 percent of your income to some form of government. Today we are following up on that bombshell. And no, we don’t advocate moving to Canada or Europe – unless you want to pay even more taxes. What you can do, though, is educate yourself and adopt a TSL- driven budget. Remember the acronym, TSL. It’s the term we’ve coined for Taxes, Savings and Life – the three big buckets where most of our dollars go.

If you follow the TSL guidelines, budgeting will be a whole lot easier.

Taxes: 40 - 50%

Pro golfer Phil Michelson got into hot water when he complained that 62 percent of what he earns goes towards taxes now. Few people feel sorry for a guy who makes close to $50 million a year. However, his complaints weren’t that far off the mark, even though CNBC reported his estimate was a little high. Consider the new federal tax bracket that is nearly 40% on families that have income north of $450,000 and California’s 13 percent income tax, and you almost start to feel sorry for Phil. Almost.

Taxes take a huge bite out of all our paychecks. That's why we suggest you budget 40 percent of your income for taxes or closer to 50 percent for really high-income households, and you'll have a good sense of what's left over for Savings and Life.

Related: 25% Of Employees Are Saying No To Free Money

Savings: 20%

For many years, Vanguard recommended saving between 8 to 12% of your gross income to guarantee a happy retirement. Recently, they upped that guideline to 12-15%. That’s thanks to lower return expectations in the future. We advise clients to try to save 20% of their gross income. That’s a significant number, but take into consideration the many “tax advantaged” ways to save (401k, SEP IRA, etc.) and you can get there a lot faster than you might think. In fact, you may be able to retire a lot sooner than you think. If 20 percent seems unrealistic right now, try starting smaller and work your way up to it.

Related: 10 Ways To Start Saving

Life – 30-40%

Now we're at the truly discretionary spending. We saved the best for last. The remaining 30 percent (40% if your tax bite is lower) of your income goes here. Spending just 30 to 40 percent of your income during your working years on living (food, shelter, transportation, insurance, kid-related costs, entertainment) will allow you to maintain your lifestyle once you retire. For Phil Mickelson, by the way, that means limiting his Life spending to about $15 million a year.

Related: INFOGRAPHIC: Budgeting For Your New Mortgage

Our TSL formula (Taxes:40-50, Savings: 20, Life: 30-40) may seem harsh at first, but whoever said getting to Easy Street (and a happy retirement) was going to be easy?



Editor's Note: This article was originally posted on November 6, 2013. It has been updated as of January 13, 2016, to reflect the latest information.