3 Keys to Financial Planning for Unexpected Major Expenses
Be Ready for Whatever Comes Your Way
Stress comes from surprises. It’s not difficult to plan for known monthly expenses, annual expenses, and even one-time large expenses, which wealth managers call major distributions.
These include things like new cars, second or third homes, boats, college tuitions, and things of that sort. Even in retirement, you’ll have some major distributions that you’ll likely know about well in advance.
Any competent wealth management firm for high net worth individuals should have a system that accounts for these planned major expenses in a way that ensures your long term financial security. Sadly, many do not, but that’s a discussion for another day.
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The real challenge comes from the surprises. The unplanned major distributions. Large expenses you had no idea you’d have to be paying for, and that weaken your confidence that your money will last through the rest of your life.
At Pillar, we call these ‘What If’ scenarios.
Examples of ‘What If’ Scenarios – Unexpected Major Expenses
What if your security system gets compromised while you’re away on a trip, and your home gets burglarized. Valuable items, some irreplaceable, get lost or damaged. Costly repairs required.
What if a winter freeze overwhelms your northern residence’s uninsulated water pipes while you’re basking in the sun down south, and the pipes burst. Water runs freely behind and through your walls for days before someone discovers it. Whole sections of your house must be rebuilt.
Costly and unexpected repairs can rear up from many places. The more assets you have – cars, real estate, boats, planes – the more chances this can happen. And while you can hope your insurance covers these sorts of things, we all know how that can go.
Back to the What Ifs…
What if a son or daughter gets caught up in a costly divorce? What if you do?
What if a family member dies, and you end up with their kids? Now you have to finish raising them, and probably pay for their college educations. And you thought you’d be done with that once your kids graduated.
What if someone has a stroke or other life-altering medical event? These can require large one-time and ongoing medical expenses.
What if you decide to give a major gift? It might be to a charity. It might be to a business startup idea for a friend or relative whose pitch really appeals to you. You might decide to start a foundation to advocate for a particular cause.
What if you get sued?
Your priorities can change. Your life situation can change. Your health can change. And all these things can change for members of your immediate and extended family.
With the surprise comes the stress. Can we stick to our financial plan? How will this affect our future? What if we no longer have enough?
The good news is, it is possible to plan ahead for unexpected major expenses and ‘What If’ scenarios. You can preserve your financial security, ensure your money won’t run out, and still achieve your most important life goals and dreams, even in the face of unplanned major distributions and costs.
1. Get Clear on the Only 5 Areas of Finances You CAN Control
Narrowing your focus on what you can control will simplify your ability to plan for what you cannot control.
Here are the five (and only five) things you can control about your money:
1. How much you spend – this is your lifestyle
2. How much you save
3. Timing of planned major distributions
4. Risk tolerance
5. How much of a legacy you want to leave
That’s it. You have control of these five things, and nothing else, when it comes to money.
Your decisions about money and your financial plan must be made based on your priorities and values as they relate to these five areas of control. And your ability to absorb unexpected and unplanned major expenses will depend on your choices in these five areas.
The conversation you need to have around these five areas is one of the most consequential discussions you’ll have in your entire life. Have it with the right person, a wealth manager who understands the unique needs facing high net worth individuals (meaning, between $1 million and $30 million in liquid assets).
The point of this conversation is to unearth your values about money and apply them to the assets you have to work with now and for the remainder of your life – even if that’s 40 or 50 more years. We’ll show you an example of how this might look a bit later.
2. Update Your Plan Every Quarter
Once your financial plan is in place, you can’t just let it sit there. Ten years might go by, and then suddenly, an unexpected major expense wallops you out of nowhere.
By continually updating your plan, you’ll be ready when that day comes. You’ll be able to adapt and adjust without having to panic.
For instance, let’s say you have a 15-year old son and a 18-year old daughter. A planned major distribution you can control is how much you spend on their college educations. You know that’s coming (assuming they go to college, and assuming they don’t win some kind of scholarship – which is rare for people of your financial caliber).
Another planned major distribution for them might be their future weddings. Even if that’s 20 years in the future, you can be fairly confident it will happen someday. So you can plan for it.
These sorts of things fall under item 3 on the list of five things you can control. You can control it because, you don’t have to pay for these things. And you can decide how much you’ll pay for them. Sure, your daughter might want a $200,000 wedding. That doesn’t mean you have to give it to her. You have control of this.
Same goes for many of your monthly and annual expenses. Suppose you decide to take a trip every year to Europe, and another trip to see your parents in Arizona. That’s part of your routine, and you know it’s coming.
The important thing to recognize is – all of this can change. What if your parents move from Arizona to be closer to you? What if they die in the next ten years? What if your daughter decides she wants to get married in Namibia and it will only cost a few thousand bucks?
You could end up with more money than you expected, or less. Your values will change. Your priorities will change. Thus, what you spend, what you save, what you give – all of these will change too.
By failing to update your financial plan as your life situation, goals, and priorities change, you are exposing yourself to the stress of the surprise, to the panic when that big unexpected cost comes into your life.
Find a wealth advisor who updates his clients’ plans every quarter, so no one gets blindsided by unexpected expenses. Updating every quarter positions you to respond with an even keel, without panic.
3. Incorporate Unplanned Major Expenses into Your Plan
Now that you understand the vital importance of updating your plan every quarter, you can perceive the value of this third and final strategy.
Planning for unexpected major distributions essentially falls into the ‘How Much You Save’ category of the five things you can control. It’s more complicated than that, but thinking of it in these terms gives us a place to start.
Let’s say you choose to anticipate $500,000 in unexpected expenses over the course of your life. That means you need to have an extra $500,000 set aside, ready and waiting, so if something costly does happen, you can handle it without a single second of worry, fear, stress, or panic.
Placing this $500,000 in reserve will affect how much money you save, how much you spend, how much you spend on planned major distributions, how much you give, and your risk tolerance. All five areas of control are affected by your decision to plan for unexpected expenses.
By incorporating this decision into your financial plan and updating it every quarter, you’ll be able to see this money there, continually. You’ll know you’re ready, quarter after quarter, year after year.
And if the day comes, when you’re 85, and you begin to realize that no major costly event appears likely to happen in your lifetime, you get to experience the joy of having an extra $500,000 to pass on to your heirs or use for something else.
If you don’t use it, it’s a blessing. If you do use it, it’s a relief.
Create a Financial Plan that Anticipates Unplanned Major Expenses
Creating this sort of financial plan requires a lot more than just pining for robust investment returns. For high net worth individuals and families, your best course of action is to work with a wealth management firm that specializes in serving clients in your unique situation.
Pillar Wealth Management is such a firm, and we’d love to serve you by:
1. Helping clarify your values around the five areas of control
2. Creating your plan
3. Updating your plan quarterly
4. Planning for unexpected major expenses that may occur in your life
Do you want to stop worrying about what might happen and how it will affect your financial security? Start a Conversation with Us