Next Steps
Last week I told you the story of a client couple that was referred to us. This week I’m here to tell you a little about how that story has evolved and also give you my two cents on some of the things I think almost everyone should be thinking about.The steps I outlined in last week’s post were the basics, the things this couple needed to do that essentially provided the foundation for getting their financial house in order. As you may recall, there was more work to be done.
The “real” first step for this couple was to begin tracking expenses. To this end we set them up with an eMoney Advisor account so they could link their spending accounts and have all the transactions uploaded to their website. They are now taking an hour at the end of every month to review and categorize all the transactions for the purpose of establishing budgets for each area.
They also stopped making extra mortgage payments and reduced the amount they were sending to their respective qualified retirement plans and redirected the cash flow increase to a savings account with an online bank for maximum interest earnings (even if it is only 1% per year right now). We developed a strategy for longer term savings vehicles and risk investments once this savings account reaches a level that would provide a safety net. I’ll come back to this one.
They met with an estate planning attorney and eventually executed a formal legal framework for protecting themselves and their family from agonizing delays and expenses associated with incapacitation or death. We also helped them develop a plan of insurance to this end within the context of all the other areas of their current position, but especially their cash flow.
They fired the extra layer of money managers in their employer sponsored retirement plan and transferred their money to a short list of low-cost index funds. This alone will save them tens of thousands.
Now back to the long term investment strategy. Recall that one partner in this couple has a business. We recommended writing a business plan. We nagged them until they did this, then helped them decide how much of their ongoing cash flow to direct to investment in the business, and how much to direct outside the business. Because the business is after all, just another risk investment. It’s one we’re particularly fond of, as small business owners ourselves, but also because the partner in question has at least some level of control over the ROI from their business, and because of the “extra” tax control investment in their business offers (I’m referring here to the reduction in self-employment tax this provides).
Beyond investment in the business, the strategy we recommended included investments outside the other partner’s retirement plan. Because the bulk of their existing risk investments were in this plan, they were largely confined to the most cost efficient broad market indexes. So we recommended some alternative asset classes to help further diversify their overall position and hopefully to mitigate the effects of inflation on their cash and other “paper” assets. This included a plan for rental real estate, commodities, and natural resources.
All this took some time, but they’re implementing the recommendations to the best of their ability, and we’re reviewing progress, what’s working well, and what needs adjusting together on an ongoing basis.
This client couple gets a gold star for "most-improved."
Who do you know that could use some help getting their financial house in order?