How To Plan For Major Life Events
“The whole of life becomes an act of letting go.” - LIFE OF PI
written by David Magee, directed by Ang Lee
(3.5-minute read)
Life events happen. Some of them are planned and some take you by surprise. I’m not here to tell you which ones are more important, but I can tell you that it’s possible, and important, to plan for both.
There are some important questions you should answer before making a plan.
WHAT’S THE COST
You should have an idea of the approximate cost of this event. It doesn’t have to be exact since major price tags are often a moving target. A good rule of thumb is to set a price range, then overestimate. You don’t want to be in a position where you saved for months or years only to come up short when the time comes. Having an additional 10% - 20% more than you thought could be very helpful.
If you’re unsure of the potential future cost, do your research. Get quotes if necessary. Ask others how much it cost for them to fund something similar. Their situation will have been different so be careful when trying to compare apples to apples. For example, if you need a new roof on your house, and your neighbor only spent X amount of dollars, perhaps the square footage of their roof is much less than yours. Maybe their cousin gave them a deal. On the other hand, perhaps they splurged and got the most hyper-efficient technology available in roof tiles and it cost double.
So try to set a budget you’re comfortable with and adjust appropriately.
WHAT’S THE TIME
Knowing when this event is taking place is equally important. If your life event is retiring in twenty years, that’s drastically different than buying a new home in three.
Once you set a budget you can work backwards from this time horizon. If you want an additional $75,000 for a down payment on that home in three years, you need to save about $2,100 per month.
WHAT’S THE INVESTMENT
Your time horizon and budget will help determine how you put this money to work. If you have $50,000 saved for a new car next year, then you can’t put that money at risk. If you invest it, and it loses 20% over the next twelve months, you’re going to be pretty upset when your hard-earned money is now worth $40,000. Therefore putting it into something safer is prudent.
“Safer” could mean CDs, High-Yield Savings, U.S. Treasuries, or money market funds. U.S. Treasuries are considered “risk-free” and, for most banks, your money is FDIC insured up to $250,000.
But if you don’t need this money for ten or more years, then usually it’s okay to place it in a low-cost index fund that has a tendency to rise over time. For example, there are plenty of ETFs (exchange traded funds) that invest in the biggest companies on Wall Street. For those of you who just want to be “in the market,” one of these funds will probably suffice. You can purchase shares of this fund just like you can a stock. Since these funds own shares of hundreds of companies, you will own a small piece of those companies as well. If the markets go down next year, you still have plenty of time to recover.
WHAT’S THE EVENT
What if this is an unexpected life event? These situations may not have a traditional price tag either. Perhaps you lose a job. Medical and health issues could be catalysts for a major life event. Most people don’t get into a marriage with a plan of divorcing, but unfortunately it can become a reality.
We certainly can’t plan for every scenario, but this is where an Emergency Fund comes into play. Having six months or more of monthly expenses saved for an emergency, and placed in a “safe” investment, can help you weather those difficult storms.
Financing an emergency should be a last resort, but it is an option. When we have emergencies, we don’t want to add to the problem by taking on debt. Be mindful of interest rates and repayment terms.
You can avoid pitfalls of high-priced life events by planning accordingly. If they come out of nowhere, then having an Emergency Fund can help see you through it. Everyone’s situation is different so please research and do what is right for you. Seek a professional before making financial decisions.
If you’d like more information about personal finance, you can schedule a complimentary meeting HERE.
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