It is important not to rush to make major financial decisions at these times, when you’re most vulnerable. Postpone any action until you have had time to recover from the event and evaluate all your options carefully. This can be difficult, because some financial salespeople will rush to contact you in these circumstances. For example, when you have a child you will find that insurance agents, financial planners, and stockbrokers actively encourage you to buy insurance and start investing in a college fund. Although these are valid objectives, don’t be pushed into any expensive decisions. People who get large sums of money from severance packages, retirement benefits, or insurance policies when a loved one dies are also likely to hear from financial salespeople eager to help them invest the funds. This is another time to wait. These brokers may have a greater interest in selling their own products than advising you on the best strategy for your needs.
Managing Two Incomes
Did you know that the earnings of the average dual-income family will add up to more than $1 million over the wage earners’ lives? Today, two-income couples account for the majority of U.S. households, and many depend on the second income to make ends meet. For others, it provides financial security and a way to afford “extras.” Often, however, a second income doesn’t add as much as expected to the bottom line. Higher expenses such as child care, taxes, clothing, dry cleaning, transportation, and lunches may consume a large part of the second paycheck. And two-income families tend to spend what they earn rather than save it.
Managing Two Incomes
Did you know that the earnings of the average dual-income family will add up to more than $1 million over the wage earners’ lives? Today, two-income couples account for the majority of U.S. households, and many depend on the second income to make ends meet. For others, it provides financial security and a way to afford “extras.” Often, however, a second income doesn’t add as much as expected to the bottom line. Higher expenses such as child care, taxes, clothing, dry cleaning, transportation, and lunches may consume a large part of the second paycheck. And two-income families tend to spend what they earn rather than save it.
Managing Employee Benefits
As we’ve already discussed, if you hold a full-time job then your employer probably provides various employee benefits, ranging from health and life insurance to pension plans. As we saw when analyzing the Gonzaleses’ case, these benefits can have a major financial impact on family income. Most American families depend solely on employersponsored group plans for their health insurance coverage and also for a big piece of their life insurance coverage and retirement needs. Today’s well-defined employee benefits packages cover a full spectrum of benefits that may include:
• Health and life insurance
• Disability insurance
• Long-term care insurance
• Pension and profit-sharing plans
• Supplemental retirement programs, such as 401(k) plans
• Dental and vision care
• Child care, elder care, and educational assistance programs
• Subsidized employee food services
Each company’s benefit package is different. Some companies and industries are known for generous benefit plans; others offer far less attractive packages. In general, large firms can afford more benefits than small ones can. Because employee benefits can increase your total compensation by 30% or more, you should thoroughly investigate your employee benefits to choose those appropriate for your personal situation. Be sure to coordinate your benefits with your partner’s to avoid paying for duplicate coverage. Companies change their benefit packages often and today are shifting more costs to employees. Although an employer may pay for some benefits in full, typically employees pay for part of the cost of group health insurance, supplemental life insurance, long-term care insurance, and participation in voluntary retirement programs.
Due to the prevalence of two-income families and an increasingly diverse workforce, many employers today are replacing traditional programs, where the company sets the type and amounts of benefits, with flexible-benefit (cafeteria) plans. In flexible-benefit programs, the employer allocates a certain amount of money to each employee and then lets the employee “spend” that money for benefits that suit his or her age, marital status, number of dependent children, level of income, and so on. These plans usually cover everything from child care to retirement benefits, offer several levels of health and life insurance coverage, and have some limits on the minimum and maximum amounts of coverage. Within these constraints, you can select the benefits that do you the most good. In some plans, you can even take part of the benefits in the form of more take-home pay or extra vacation time! Along with greater choice comes the responsibility to manage your benefits carefully. You should periodically assess the benefits package you have at work relative to your own individual/family needs, supplementing any shortfall in company benefits with personal coverage. Except perhaps for group medical coverage, don’t rely on your employer as the sole source of financial security. Your coverage may disappear if you change jobs or become unemployed and, especially with life insurance and retirement plans, most employee benefits fall short of your total financial needs.
Managing Your Finances in Tough Economic Times
Tough economic times can be due to broad macroeconomic trends like a recession, or they can be brought on by more personal, local developments. The effects of recessions and financial crises divide people into three groups: (1) those who are directly and severely hurt through job loss, (2) those who are marginally hurt by reduced income, and (3) those who are not directly hurt. If you are in either of the first two groups, you must make significant lifestyle changes to reduce spending. Even if you are in the last group, a recession affects you indirectly. For example, retirement accounts typically drop in value and financial plans must be revised. And everyone’s expectations are at least temporarily affected, which causes most people to be more cautious about their expenditures during a recession or crisis.
The financial crisis of 2008 and 2009 was a macroeconomic challenge of historic global proportions. It drove home the benefits of having a sound financial plan and dramatized the cost of not having one. The precipitous decline in stock and home prices and the many people laidoff from their jobs made everyone think a lot more about financial planning in general and how to survive a financial crisis in particular. Although we all hope that such broad crises will be rare, it is important to plan for a possible recurrence. All of the financial planning principles explained in this book remained valid during the recent global financial crisis and should continue to serve us well in any future similar situations. But the breadth of the recent crisis posed some special planning issues.
So how do you best plan to survive a broad-based financial crisis? First, you remind yourself of the key principles of financial planning presented in this book:
• Spend less than you earn.
• Keep investing so your money continues to work toward your goals.
• Know where you are and plan for the unexpected. You cannot know where you are financially unless you carefully, and frequently, update your family’s budget. And it is important to set aside money for an emergency fund. As discussed earlier in this chapter, you should set aside enough cash to last between 3 and 6 months.
Second, don’t panic when financial markets crash! This means that you shouldn’t try to time the market by buying when the experts say it’s at a low or by selling when they say it’s at a high. Continue to invest for the long term but keep in mind how close you are to achieving your financial objectives. For example, if you pull all of your money out of the stock market when it has fallen, you will not be positioned to take advantage of its eventual recovery. You can take specific actions in your day-to-day life to deal effectively with a financial crisis or recession. Consider the following ways to manage expenses in times of stress:
As we’ve already discussed, if you hold a full-time job then your employer probably provides various employee benefits, ranging from health and life insurance to pension plans. As we saw when analyzing the Gonzaleses’ case, these benefits can have a major financial impact on family income. Most American families depend solely on employersponsored group plans for their health insurance coverage and also for a big piece of their life insurance coverage and retirement needs. Today’s well-defined employee benefits packages cover a full spectrum of benefits that may include:
• Health and life insurance
• Disability insurance
• Long-term care insurance
• Pension and profit-sharing plans
• Supplemental retirement programs, such as 401(k) plans
• Dental and vision care
• Child care, elder care, and educational assistance programs
• Subsidized employee food services
Each company’s benefit package is different. Some companies and industries are known for generous benefit plans; others offer far less attractive packages. In general, large firms can afford more benefits than small ones can. Because employee benefits can increase your total compensation by 30% or more, you should thoroughly investigate your employee benefits to choose those appropriate for your personal situation. Be sure to coordinate your benefits with your partner’s to avoid paying for duplicate coverage. Companies change their benefit packages often and today are shifting more costs to employees. Although an employer may pay for some benefits in full, typically employees pay for part of the cost of group health insurance, supplemental life insurance, long-term care insurance, and participation in voluntary retirement programs.
Due to the prevalence of two-income families and an increasingly diverse workforce, many employers today are replacing traditional programs, where the company sets the type and amounts of benefits, with flexible-benefit (cafeteria) plans. In flexible-benefit programs, the employer allocates a certain amount of money to each employee and then lets the employee “spend” that money for benefits that suit his or her age, marital status, number of dependent children, level of income, and so on. These plans usually cover everything from child care to retirement benefits, offer several levels of health and life insurance coverage, and have some limits on the minimum and maximum amounts of coverage. Within these constraints, you can select the benefits that do you the most good. In some plans, you can even take part of the benefits in the form of more take-home pay or extra vacation time! Along with greater choice comes the responsibility to manage your benefits carefully. You should periodically assess the benefits package you have at work relative to your own individual/family needs, supplementing any shortfall in company benefits with personal coverage. Except perhaps for group medical coverage, don’t rely on your employer as the sole source of financial security. Your coverage may disappear if you change jobs or become unemployed and, especially with life insurance and retirement plans, most employee benefits fall short of your total financial needs.
Managing Your Finances in Tough Economic Times
Tough economic times can be due to broad macroeconomic trends like a recession, or they can be brought on by more personal, local developments. The effects of recessions and financial crises divide people into three groups: (1) those who are directly and severely hurt through job loss, (2) those who are marginally hurt by reduced income, and (3) those who are not directly hurt. If you are in either of the first two groups, you must make significant lifestyle changes to reduce spending. Even if you are in the last group, a recession affects you indirectly. For example, retirement accounts typically drop in value and financial plans must be revised. And everyone’s expectations are at least temporarily affected, which causes most people to be more cautious about their expenditures during a recession or crisis.
The financial crisis of 2008 and 2009 was a macroeconomic challenge of historic global proportions. It drove home the benefits of having a sound financial plan and dramatized the cost of not having one. The precipitous decline in stock and home prices and the many people laidoff from their jobs made everyone think a lot more about financial planning in general and how to survive a financial crisis in particular. Although we all hope that such broad crises will be rare, it is important to plan for a possible recurrence. All of the financial planning principles explained in this book remained valid during the recent global financial crisis and should continue to serve us well in any future similar situations. But the breadth of the recent crisis posed some special planning issues.
So how do you best plan to survive a broad-based financial crisis? First, you remind yourself of the key principles of financial planning presented in this book:
• Spend less than you earn.
• Keep investing so your money continues to work toward your goals.
• Know where you are and plan for the unexpected. You cannot know where you are financially unless you carefully, and frequently, update your family’s budget. And it is important to set aside money for an emergency fund. As discussed earlier in this chapter, you should set aside enough cash to last between 3 and 6 months.
Second, don’t panic when financial markets crash! This means that you shouldn’t try to time the market by buying when the experts say it’s at a low or by selling when they say it’s at a high. Continue to invest for the long term but keep in mind how close you are to achieving your financial objectives. For example, if you pull all of your money out of the stock market when it has fallen, you will not be positioned to take advantage of its eventual recovery. You can take specific actions in your day-to-day life to deal effectively with a financial crisis or recession. Consider the following ways to manage expenses in times of stress:
- Postpone large expenses. For example, hold on to your old car rather than buying a new one. And you could wait on that new refrigerator or big-screen TV.
- Cut back on the number of times you eat out
- Take your vacation at or around home
- If you rely mostly on a cell phone, consider canceling your landline phone and/or the extras like caller ID.
- Cancel nonessential magazine subscriptions.
Recessions and financial crises can be challenging. A financial plan that considers such contingencies will help you weather the storm.
Adapting to Other Major Life Changes
Economic hardships are not always the result of adverse macroeconomic developments. Even in the best of times, people can lose their job or face other hardships. Situations that require special consideration include changes in marital status and the need to support grown children or elderly relatives. Marriage, divorce, or the death of a spouse results in the need to revise financial plans and money management strategies.
Take an inventory of your financial assets and liabilities, including savings and checking accounts; credit card accounts and outstanding bills; auto, health, and life insurance policies; and investment portfolios. You may want to eliminate some credit cards. Too many cards can hurt your credit rating, and most people need only one or two. Each partner should have a card in his or her name to establish a credit record. Compare employee benefit plans to figure out the lowest-cost source of health insurance coverage, and coordinate other benefits. Change the beneficiary on your life insurance policies as desired. Adjust withholding amounts as necessary based on your new filing category.
In event of divorce, income may decrease because alimony and child-support payments cause one salary to be divided between two households. Single parents may have to stretch limited financial resources further to meet added expenses such as child care. Remarriage brings additional financial considerations, including decisions involving children from prior marriages and managing the assets that each spouse brings to the marriage. Some couples develop a prenuptial contract that outlines their agreement on financial matters, such as the control of assets, their disposition in event of death or divorce, and other important money issues. Death of a spouse is another change that greatly affects financial planning. The surviving spouse is typically faced with decisions on how to receive and invest life insurance proceeds and manage other assets. In families where the deceased made most of the financial decisions with little or no involvement of the surviving spouse, the survivor may be overwhelmed by the need to take on financial responsibilities. Advance planning can minimize many of these problems.
Adapting to Other Major Life Changes
Economic hardships are not always the result of adverse macroeconomic developments. Even in the best of times, people can lose their job or face other hardships. Situations that require special consideration include changes in marital status and the need to support grown children or elderly relatives. Marriage, divorce, or the death of a spouse results in the need to revise financial plans and money management strategies.
Take an inventory of your financial assets and liabilities, including savings and checking accounts; credit card accounts and outstanding bills; auto, health, and life insurance policies; and investment portfolios. You may want to eliminate some credit cards. Too many cards can hurt your credit rating, and most people need only one or two. Each partner should have a card in his or her name to establish a credit record. Compare employee benefit plans to figure out the lowest-cost source of health insurance coverage, and coordinate other benefits. Change the beneficiary on your life insurance policies as desired. Adjust withholding amounts as necessary based on your new filing category.
In event of divorce, income may decrease because alimony and child-support payments cause one salary to be divided between two households. Single parents may have to stretch limited financial resources further to meet added expenses such as child care. Remarriage brings additional financial considerations, including decisions involving children from prior marriages and managing the assets that each spouse brings to the marriage. Some couples develop a prenuptial contract that outlines their agreement on financial matters, such as the control of assets, their disposition in event of death or divorce, and other important money issues. Death of a spouse is another change that greatly affects financial planning. The surviving spouse is typically faced with decisions on how to receive and invest life insurance proceeds and manage other assets. In families where the deceased made most of the financial decisions with little or no involvement of the surviving spouse, the survivor may be overwhelmed by the need to take on financial responsibilities. Advance planning can minimize many of these problems.
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