With everyone spending more time at home this year and with interest rates where they are currently, we’ve been having a lot of exciting conversations with our clients regarding:
- Buying or building a new home
- Buying a second home
- Adding a new addition to their home
- Installing a new pool, building a new deck, or other home renovation projects
When deciding whether to take on a big and seemingly unnecessary expense like this, it feels daunting. You are weighing the trade-offs of whether it makes sense to spend your dollars here versus saving it, investing it, or spending those dollars on something more practical. The truth is, you could always be saving or investing more of every dollar that you earn. You could always be spending your money on more sensible things. In this way, money creates a lot of anxiety, because we feel like we could always be doing better. Often, we find that people hold back on exciting goals like the ones listed above.
Here are three ways a financial plan can help to alleviate these types of concerns, change your relationship with money, and help you feel liberated in making big financial decisions like these:
- Stress test your plan to see the impact – If you already have a base financial plan in place today, you can plug in the costs of this new goal to see how this decision could affect your future. So rather than holding back, you can quantitatively confirm whether your plan is still on track. If this new goal causes you to fall off track, then the plan enables you to evaluate what other levers you could adjust in order to make it work, such as saving more in the future, spending less, retiring later, reducing the cost of another goal, etc.
- Confirm you have sufficient cash savings – Your financial plan helps to determine what your asset allocation should be, meaning how much you hold in stocks, bonds, and cash. That’s because your plan will demonstrate the rate of return you need to earn on your money in order to fund all your future goals. With that information, you can pinpoint exactly how much you need to hold onto in cash / savings. This way you don’t need to feel that guilt in wondering whether the money used for this new goal should’ve gone towards savings. Alternatively, if you end up having to dip into savings a bit to fund this new goal, then you can develop a new plan for building that cash back-up to where it needs to be.
- Objectively evaluate your investments and savings rate – Financial plans take a look at your current investable assets and how much you’re contributing to them each year, then quantifies whether you’re on track to fund all your future goals. This helps in two ways. First, it provides a context for how much you really need to save / contribute to your investment accounts each year, so that once you hit your savings goal, you can feel free to spend everything else without guilt. Additionally, if you end up having to sell some assets in order to fund your goal, then your plan can demonstrate how that impacts your plan over the long-term.
We describe these conversations with our clients as “exciting” because it’s important to remember that money is just a tool that, if managed well, can greatly enhance your life. By putting a financial plan in place, it will help you tackle big financial decisions like these, and it will help you to live your most ideal life.