Last we week talked about putting your money to work, rather than letting it own you. I showed how sitting in cash isn’t “safe” and actually creates negative purchasing power.  The solution is to give every dollar a job. Those dollars that aren’t assigned to a specific task like paying bills or working up toward an emergency fund should be put into diversified investments that earn you money and give you a boost against inflationary forces. Today I want to talk about another common problem I hope you can start avoiding — being reactionary with your finances.

When your paycheck comes in, your finances should operate like a well-oiled machine. Your retirement contribution should be taken directly from your check.  After that, there’s an automatic deposit to emergency funds, then to your savings goals, then the leftover money is for living expenses. Seems simple, right? Not necessarily!

Most people operate much differently; they make reactive decisions. A bill comes in for a major house or car repair and they put it on a credit card because they haven’t taken the time to save up for emergencies. Retail therapy comes in handy in the moment, but now they’re short on the insurance payment that only comes due every six months. A bonus gets spent up immediately on past due bills or debt rather than meeting their goals. They prioritize purchasing large items now like a car or even a house while neglecting long-term goals such as retiring at a decent age.   I say “they,” but it’s really you, me — all of us — we’re guilty of this at one point or another in our lives.

A recent article in The Atlantic told this story well. In it, the author characterized financial instability as a problem so bad that it’s the “secret shame” of the middle class. I’ve seen many of these numbers before: 47% percent of Americans say they’re not able to handle a surprise $400 dollar expense, and about 38 percent of households carry debt — about $15,000 on average, according to the Federal Reserve. Those who make far more that median incomes (like the author of the article) can easily get themselves into a state of financial peril by being reactionary and not having a plan in place. 

The author, Neal Gabler, gave a very detailed and courageous account of all the things that happened to him during his career to put him in an unstable financial position.  Being a writer, he frequently received book advances, but didn’t budget to pay for the income taxes, so he had to add to his debts. He and his wife sent their kids to private school but never saved for their own retirement.   He talks about making bad choices along the way, as if he had control the whole time. The truth is he was forced to make those “choices” in reaction to his financial situation. He never had a plan. His story is really about how all these reactions added up to major financial problems. Then on top of that, unforeseen stuff came up, as it tends to do, which exacerbated his financial problems. He writes:

“But the problem with finances is that life doesn’t cooperate. In our case—and I have a feeling in the case of just about every American—there were unforeseen circumstances.”

Here are my thoughts on this: instead of thinking about everyday life stuff as “unforeseen circumstances,” and having to figure out how to deal with it, try setting aside enough savings and planning ahead a little.  You probably won’t be able to pinpoint exactly what unforeseen circumstances will come up, and when. But you CAN plan to have a bit of a cushion to absorb those unforeseen expenses in general.  You can also sit down and plan for big expenses (family, education, home, travel). A little work upfront will help prevent you from getting sucked into this stressful, reactionary cycle.

Check out the article and see what you think. It chronicles how not to do things, but it doesn’t talk much about potential solutions. Here’s what I know: personal financial insecurity isn’t always caused by a lack of financial resources it’s more often caused by problems allocating those financial resources.

Want to be more proactive? Read more about the first question I ask to get the financial planning process started.

The Solution

Plan ahead!  You know that certain life events are going to happen to you, you just may not know exactly *when* they will happen. I’ve touched on it in every part of this series, and I’ll cover it again. Financial goal setting is important. It’s as important as setting life goals and career goals.

I’m not talking setting a goal for how much money you want to make one day (although, that’s a fine goal to set), I’m talking about getting in touch with the things that are most important to you in life and recognizing that some of that is going to require time and money to achieve. Once you start with putting goals on paper, behaviorally, you’re more likely to make choices that help you achieve those goals. This includes deliberately setting aside money for things that are important to you.

I wish that Neal (The Atlantic article author) and his wife had sought help from a financial advisor earlier.  If they had, a good advisor would’ve facilitated a discussion about the value they placed on education for their children, for instance, and provided some options to get there. If they had saved only $100 a month for 18 years for each child, they would’ve been able to provide close to $50,000 in support to each child for their education. That doesn’t pay for an Ivy League school, but it does help close the gap on state school tuition. Thinking about it in these terms, perhaps they could have afforded to set aside more each month. Perhaps also, the planning process would’ve helped them view it less like a sacrifice in the present and more as an investment in the future. Similar thinking could’ve helped provide new strategies for debt repayment, home buying, and tax planning.

You won’t be able to estimate everything perfectly, but if you decide, for instance, that being able to take international trips every year is really important to you, make a budget plan to get there. If you decide that you want to retire somewhere exotic, start making a plan to get there. If you want to be self-employed for a period of time, or for the rest of your career, find out the tax implications and educate yourself on providing for your retirement and healthcare, among other benefits.

Make the goals SMART goals: Specific, Measurable, Achievable, Realistic, and Time-bound.  The more detailed, the better.

Dream Big

And don’t forget to DREAM BIG! Most people have pretty big goals — but go bigger! A common goal I hear is, “I want to buy a house, and take trips 2-3 times a year, while paying off my student loans.”  That’s big!  But what about more long-term? Your peak earning years are probably yet to come. Without some long-term, “dream big” goals, you’ll be susceptible to spending into each of your raises, being reactive, and not making your money work for you.

That’s why I always recommend setting some stretch goals for yourself. Do you want to start a business one day? Retire early? Start a foundation or give back to your community in some other way? Make sure the next generation of your family is taken care of?

As you start your brainstorming think about why money is important to you. What do you value most in life? And what would you like to achieve during your lifetime?

Hopefully these tips got you thinking.  How do you plan to improve your prospects for achieving your dreams and goals? How do you plan to avoid these common financial problem areas?

This is the final article in a three-part series about how to avoid common financial problems. You can click these links to read Part 1 and Part 2.


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