As a married mother of three, Vilma Andrews finds life frequently short-circuits her financial plans.
“Unfortunately, we manage our finances as we go along,” said Andrews, an assistant nurse at an elementary school in Sienna Plantation, Texas.
Andrews isn’t alone. Many investors these days are worried about their ability to weather unexpected expenses, according to the third quarter 2018 Wells Fargo/Gallup Investor and Retirement Optimism index. In fact, the study found investors are generally more optimistic about the stock market and investment balances than their bank accounts.
Although the latest optimism index, released Sept. 26, is down five points from second quarter 2018, its score of +98 still keeps the index in record territory — a range not seen for 17 years.
The Aug. 13-20 study surveyed 1,059 U.S. investors ages 18 and older who had at least $10,000 in investable assets. Seventy-five percent were nonretirees, and 25 percent were retirees. Just 55 percent of investors overall described themselves as “very well prepared” to deal with an unexpected $5,000 expense — confidence that plunged to 33 percent for a $10,000 expense.
The study also found investors are more goal-setters than planners. When asked which of three descriptions best matched their personal approach to planning, only 15 percent of nonretired investors said they set specific financial goals and followed detailed plans to achieve them.
“As much as we try to plan ahead, life gets in the way,” Andrews said. “We’re constantly being bombarded with unexpected expenses related to our children or life in general — and sometimes it’s difficult to make ends meet, much less contribute to our retirement plan.
“Most of my friends feel the same way. Not having enough money to retire comfortably is a frightening prospect.”
Imagine your ‘future self’
Dan Prebish, director of Life Event Services at Wells Fargo Advisors, understands those concerns.
What struck him most about the survey was how investors seek out professional advice for saving for college and retirement, but not for other life events that can have significant financial impacts: marriage, divorce, children, or aging and increased health care costs.
What to do? Behavioral finance suggests visualizing your “future self” financially — like top athletes imagine sinking a putt to win a tournament or making a touchdown to win the Super Bowl, Prebish said.
“The research says if I just look at the ‘me right now,’ then planning and saving is hard — so we push that aside,” said Prebish, a former estate planning and tax attorney. “But when they’re asked to ‘think about yourself in 10 years or at retirement,’ our perspective changes.
“We become more motivated to do planning, and to think of savings as ‘paying myself first’ versus ‘giving up something I should have,’” he said. “We’re more apt to plan ahead if we think about that ‘future self’ and see the way the actions we take today could potentially benefit that future me in a meaningful way.”
Make small changes for a big impact
Regardless of an individual’s situation, Prebish recommends making the small changes that add up to a big impact on financial health over time, whether it’s selecting the auto-increase option in a 401(k) plan at work, setting up automatic transfers to begin saving a little each month, or finding ways to do the things you enjoy more affordably — eating out at less expensive restaurants, or less often.
“Like many investors in the study, we save money by cutting back on consumer goods and daily living expenses such as our cell phone plans and finding ways to save on our electric bill and cable bills,” Andrews said. “We forego driving luxury cars and have chosen instead to dedicate most of our resources into our home. The good thing is that my husband is very handy so we don’t have to hire help to maintain or improve it.”
Start with what you have
Sandra McPeak, a financial advisor for Wells Fargo Advisors in Rolling Hills Estates, California, near Los Angeles, said even her wealthiest clients are more goal-setters than planners — often tracking what they spend on short-term but not long-term needs.
That’s why she recommends clients use an online net paycheck calculator to determine their actual take-home pay after taxes, insurance, and other deductions.
“You may be making $55,000, but what you actually have to work with is $39,000, so that's your starting point,” McPeak said. “Before you can begin to make a plan, you need to first know what you have to work with.
“When you plan and start saving younger, you’re using the power of compounding (interest) in your favor,” she added. “The younger you are, the more it works for you. When you don’t plan and end up with debt, as you get older, compounding works against you.”
In the Wells Fargo/Gallup survey, investors said saving for college was the savings goal they’re least successful at attaining. Only 27 percent reported meeting or making major inroads toward the goal; another 35 percent reported some progress, and 38 percent said they’d made no progress at all.
Open up the ‘sandwich’ of financial obligations
Jason McDonald, an Austin, Texas-based financial advisor for Wells Fargo Advisors, said the sandwich-generation issues that investors ranked as the most challenging life event in the survey — providing financial support to a parent or adult child while supporting themselves — affect all incomes.
After sandwich generation issues (25 percent), investors cited other concerns, including having a serious illness or accident (17 percent), being the victim of identity theft or fraud (17 percent), getting divorced (15 percent), and sustaining major property damage from a natural disaster (7 percent) as the life events with the biggest financial stress.
“Most of my clients created their wealth, and didn’t inherit it,” McDonald said, “so their parents aren’t wealthy. Since these tend to be the people in their family that have money, the parents, siblings, and other relatives turn to them when they need financial assistance.
"These are the same people also sending kids to college and trying to save for retirement and to manage their financial lives," he said. "With 529 college saving plans, it’s much easier for you to plan for college than to help your parents, so proactively plan as much and as early as you can to help your children with their education if that’s a key goal.
“That way, later on in life you’ll not have two unexpected events (both halves of the sandwich) squeezing you financially at the same time.”
Talk to teach
One of the best ways adults can help children establish sound financial habits, McPeak said, is by talking about their own budgets and the reasons behind their financial choices.
“One of the really powerful things parents can do with kids growing up is to discuss: ‘How are we allocating our family's financial resources?’
“When children see how their parents had to make choices,” McPeak said, “it helps them enter the world realizing it wasn't easy for mom and dad. They learn to make the same kinds of tradeoffs.”
“Talking about money is so important,” Prebish said. “If you have someone going to college, have conversations in advance about ‘What do we think our family can realistically afford?’ Or if you have aging and ailing parents you’re concerned about, talk to them and ask, ‘Are you comfortable you will have the income that you need?’
“It’s so much easier to have those conversations before the crisis than in the crisis or when it can be too late.”
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