Putting your Financial House in Order

If you haven’t heard already, April is National Financial Literacy Month. It is a great time to pay particular attention to financial education. According to a 2017 US Bureau of Labor Statistics survey, 46%, or nearly half of American workers do not participate in any workplace retirement plan. It is reported that the majority of Americans have less than $1,000 in savings and the majority of Americans over 65 are totally dependent on Social Security for their retirement income.

With the rapid decline of traditional pension plans, Americans need to be educated on the importance of regular savings for retirement. More of us are responsible for our own financial freedom and need to be educated on how challenging that is to accomplish.

You should expect to hear more about financial and estate planning during this month. The goal of Financial Literacy Month is to “alert, educate, motivate and assist the American public to cost effectively establish and keep their financial and estate plans up to date.” A number of national industry associations representing over nearly one million financial professionals, including attorneys, accountants, insurance agents and brokers, financial planners and advisors, and trust officers are attempting to raise awareness of these needs.

It is reported that the majority of adults in Michigan have done no estate planning. You may think that you have to be wealthy or that you have to have substantial savings before you should do any estate planning. However, as we discussed in this column many times, there is a whole lot more to estate planning than planning for your stuff after death. If you are over the age of 18 and mentally competent, at a minimum, you should have a will-based estate plan, which includes a will, financial power of attorney, and health care power of attorney. You may also benefit from a trust.

This is because estate planning is much more than death planning. The definition of estate planning that we use in our office is: I want to control my property while I am alive and well; I want to plan for me and my loved ones if I become mentally disabled; and when I’m gone, I want to give what I have to whom I want when I want, the way I want; all at the lowest overall cost to me and my loved ones.

To do that, you need a helper to assist in the event of your mental disability or death. If you are married, you may have chosen your spouse. You may have divvied up the household duties and only one of you is the record keeper of the family. The record keeper is typically responsible for paying all the household bills, making sure all the taxes get done, and following up on investments and other financial matters. The other spouse has nothing ever to do with the family finances and is happy it’s that way.

However, if you are the record keeper spouse and something happens you, such as disability or death, will your non-record keeping spouse know what to do? When one of you is the record keeper and one of you has nothing to do with the finances, it’s probably best to cross-train the non-record keeping spouse. Keep a list of where things can be found, what needs to be done on a weekly, monthly and yearly basis, so if the record keeping spouse can no longer handle the finances, you will not be putting the other spouse in a difficult situation.

You can also pass on financial literacy to your children. You may think that you are helping out your kids by giving them everything you didn’t have when you were growing up. This is a common parental instinct that I have seen on many occasions. However, if you are providing everything that your kids want without having them work for it or provide for any of it themselves, then you may be unintentionally enabling them to be financially dependent and financially illiterate.

For example, give them a budget and have them be responsible for purchasing, with your assistance, toiletries, clothing or haircuts. For extras over the budget or for entertainment, they would have to pay for it themselves from their allowance or from employment.

You can help teach kids some financial and money management skills using games. An educational and fun game that I have used with my kids when they were growing up is Cash Flow, created by Robert Kiyosoki, author of Rich Dad Poor Dad. Cash Flow is a combination of the games Life and Monopoly. The goal of the game is to get out of the Rat Race by spending less money than you earn, building up retirement income and retire before anyone else does.

To help you with your financial literacy during Financial Literacy Month, Money Management International has set up an informative website which has “Your 30 Step Path to Financial Wellness”. The website can be found at http://www.financialliteracymonth.com/30Steps.aspx.

The first step in your 30 Step Path to Financial Wellness is to commit to change. This includes making informed financial decisions, communicating with family members regarding it, being aware of impulsive decisions, tracking expenses, building savings, paying bills and obligations, etc.

Once you have made a commitment to change, step two is assessing your financial situation. This helps you to see where you are so you can plan ahead for the future. Then on to step three, which is cleaning out your financial clutter. When it comes to handling family finances remember the KISS principle, Keep It Simple Silly. By simplifying your financial closet, it will not only be only less burdensome for you, it will be less burdensome for your loved ones if something should happen to you and you were unable to handle your finances.

As you age, your physiological systems slow down. It gets harder to go up and down the stairs. Just like your physical abilities, your financial abilities also decrease with age. It has been shown that after age 60, your financial ability declines about 3% each year. Confidence in your financial abilities, however, does not decrease with age. If you are a senior, you likely believe you can handle your finances as well as you could in your 40’s or 50’s. It has been reported that a senior’s confidence in their financial abilities stays the same or slightly increases with age. So starting at about age 60, there is a growing gap between what you can do with regard to your financial matters and what you think you can do.

Because of this, as you get older, it makes a whole of sense to consolidate and simplify. For example, instead of hanging onto multiple stock certificates, dividend reinvestment plans or mutual fund accounts, deposit everything into one account with a stockbroker. Most stockbrokers offer dividend reinvestments. With everything in one place, you don’t have to worry about separate certificates, dividends checks or account statements. And you only have to keep track of one statement each month or quarter, which is a whole lot easier.

This is just a short summary of the first three steps of “Your 30 Step Path to Financial Wellness”. There are 27 more steps. Check out the website. There are some very good ideas, and hopefully, you can improve your financial literacy not only during the month of April, but for the rest of your life.

By Matthew M. Wallace, CPA, JD

Published edited April 8, 2018 in The Times Herald newspaper Port Huron, Michigan as: Putting your financial house in order

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