January is the time of year where we take stock of what happened in the previous year and think of what we want the new year to be like. Some people want to lose weight, others want to improve their finances, and there are those who want to tidy up their house. Almost no one says "I'd love to go through major life changes that affect my finances this year!".
But when I look back on 2018, the majority of my clients DID experience a major life change. There were moves across the country, new babies, new jobs, and new careers. There were new houses, kids starting college, and daycare finally coming to an end. There were family members who needed help, and unexpected windfalls. Some of these changes can be planned for, but some just need to be responded to in the moment.
Way back in 2015, I wrote a blog post about planning for change in 2016. I could recycle that post every year, because it's still as relevant as it was then. This year I'll take a new angle on the change factor.
Create an Emergency Fund - Just Call it Something Else
One of the first ways financial planners recommend that you prepare for change is to have an emergency fund. Recommendations vary, but 3-6 months of household expenses is typical. This is money set aside in case your income or expenses don't turn out to be what you thought they were going to be.
Instead of calling it an emergency fund, call it your Financial Change Fund, or Rainy Day Fund, or Bump in the Road Fund. What I've seen is that the act of labeling it with the word "Emergency" means that people are hesitant to use it. They look at it as a last resort. They get themselves into all kinds of mental gymnastics trying to avoid calling their situation an "emergency", and having to use the money.
The other thing I see is that we tend to underestimate the likelihood that an "emergency" will occur, so we put off putting money aside. Even here in Southern California, we get rainy days every year, so labeling it like that starts to create the mindset that something will happen this year where I will need to use this money. It helps you start thinking about how much you will need should a bump in the road happen. Everyone's road is different though, so your bumps are going to be different than mine.
You could always call it an Inspiration Fund! Having a positive mindset around your money makes a big difference in how you respond to challenges. It can give you permission to take a risk, or take advantage of an opportunity that comes up. Change isn't always negative.
Have a Plan - Even if the Plan is to do Nothing
I can't tell you how many times I hear "I'm going through XYZ change right now, it's not the right time to do financial planning". I honestly can't process how scary it must be to go through a change without having a plan in place to deal with it. You're just winging it. There's never a bad time to hire a financial planner to help with this.
It is possible to put a plan in place in the midst of change. One of the most distressing parts of going through change is that everything seems important and urgent. Likely, there are some decisions and actions that can be put off until later. Permission to do nothing is liberating and can allow you to focus your attention. For things that must be done now, another set of eyes is invaluable.
I help separate actions and decisions into ones that can be undone from those where the ramifications are permanent. Switching contribution amounts into your company retirement plan to free up cash flow? Totally undo-able. Cashing out your 401k when you leave your job? Not so much.
Change the Plan - Early and Often
The best part about a plan is that it's easier to see the impact of change on a small piece of an overall plan, than to try and envision everything at once in the midst of moving parts. Instead of thinking that change is a negative that will throw off your plan, think of it as the opportunity to make plan improvements.
For example, many pre-retirees think they need a "retirement plan", when what they need is "retirement planning". These are very different things and underscore that financial planning is a (neverending) process, not an event. A plan is only as good as the assumptions and current data points that go into it. As time moves forward, assumptions can change, needs and wants change, and the world around us continues to evolve.
I usually look ahead and think "there's no way that this year will have as much change as last year", and I'm usually wrong. 2019 is going to be the year I expect it to come, so you're going to see more from me on this topic as the year progresses! In the meantime, check out my Job Change Financial Checklist!