We are in strange times. External forces à la COVID-19 have created massive disruption in our lives. In an ideal world, everyone would have been financially prepared for tough times, but the reality is few were. And regardless of our position going in, we will all most likely feel the effects of this tumultuous period on our assets and income for years to come.
Sheltering in place creates a perfect opportunity to address those pesky financial projects you have pushed off. Though dealing with money issues holds no more appeal now than it ever did, lean into it as a spring-cleaning initiative and a welcome distraction while so many of the usual seasonal activities are off limits.
In your approach, be careful not to make common missteps that can lead to poor financial outcomes. It’s important to make financial plans and decisions based on logic, not emotion — even when your world seems to have lost any semblance of stability. Here are five financial mistakes I see people making during this global crisis.
Mistake 1: Making Emotional Investment Allocation Decisions
Volatility has abounded lately, and markets have dislocated after a 10-plus-year bull-market run. When you see your balance go down, view it pragmatically, and don’t allow yourself to make an emotionally driven decision to reallocate your investments. Remember how and why you originally structured the portfolio the way you did. The longer your time horizon, the more risk you can assume. However, if your life circumstances have changed or your allocation no longer aligns with your intent for the money, you should consider making risk changes.
Mistake 2: Not Actively Building An Emergency Savings Account
Economic turmoil has exposed the fact that many didn’t have enough emergency savings to cover living expenses through a crisis. While we could not have predicted a pandemic, it’s always critical to have emergency savings not earmarked for large purchases. A good rule of thumb is to keep three to six months of living expenses in an easy-to-access account.
If you think it might take longer than six months to get reemployed, adjust the amount accordingly. If you have not begun to fund this goal, just start with a minimal amount per month.
Mistake 3: Not Talking To A Financial Planning Professional
Many people omit professional financial planning, because they feel it’s easier or cheaper to take a do-it-yourself approach to their finances. After all, the “Google machine” puts plenty of information at our fingertips. However, a subject matter expert can take the emotion out of your decision-making. They can help not only from a technical standpoint, but also from a psychological perspective, by serving as an objective and experienced partner to help keep you on track with a clearly defined financial plan that speaks to your specific situation: goals, objectives and time horizon.
Most people lack the specialized knowledge required to coordinate the many aspects of their financial world around a unified plan. Managing your various accounts should be a byproduct of the central financial plan, and having a highly competent financial planning and investment advisor oversee the process is often the most beneficial option for individuals. But be sure you’re getting the services you’re paying for. These should include:
• Development of a balance sheet and a cash flow statement.
• Reviewing or establishing your life insurance.
• Talking with your certified public accountant and estate planning attorney annually.
• Advising on investment strategies like tax loss harvesting and rebalancing of assets.
• Being there for you as needs arise.
• Regularly discussing your financial situation.
• Aligning estate documents with accounts and insurance policies.
Mistake 4: Assuming Estate Documents Are Adequate
The pandemic has forced us to face our own mortality. Everyone knows they need a will or revocable living trust, but people often avoid completing or updating these documents. State statutes are constantly revised, and even documents completed recently could be out of date due to new legislation, life changes, shifting relationship dynamics, etc.
Make sure you work with an attorney who specializes in estate planning. They will need your current balance sheet, life insurance schedule and details of any business ownership. If possible, seek an executive summary from a different estate-planning attorney to verify that the documents accurately describe your desires and to have another set of professional eyes scan for any gaps.
But preparing these documents should be more than a box-checking exercise. There are also values-based decisions to consider, some of which may be uncomfortable. For example, should you establish protection (from potential creditors, predators and divorcing spouses) around assets for certain beneficiaries? Is each of your beneficiaries ready for a lump sum, or would a longer income distribution strategy be appropriate? While Junior may be very capable of receiving a million dollars, perhaps you would rather provide it over time so as not to potentially enable him.
Finally, now is the time to do beneficiary audits. Designations on retirement accounts and life and annuity contracts supersede estate documents, so be sure they are correct. Some assets may need to be retitled to a revocable living trust to avoid probate. A good financial advisor will help you anticipate and address these tasks.
It is a good idea to perform an estate document review every two years. This does not mean you need to overhaul the documents, but you should obtain an updated summary of what everything says.
Mistake 5: Skipping Annual Reviews With Your Financial Advisor
Do not delay or avoid review sessions during the pandemic. It’s more important than ever that you stay engaged in your financial world. You can make this uncertain time a positive by creating more awareness for yourself around your financial goals and how you implement them. Activities like tax such as harvesting and rebalancing investment accounts are cornerstone strategies to discuss with your advisor during market dislocations.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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May 22, 2020 at 06:47PM
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Five Common Financial Mistakes To Avoid During The Pandemic - Forbes
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