734-468-3050 dennis@telosfp.com

Thanks for coming back for the latest edition of Planning for your Purpose; Telos Financial’s blog where I discuss different topics related to financial planning. Dennis LaVoy is Ann Arbor’s financial advisor serving clients throughout Michigan and across the country.

The primary purpose of the blog is to introduce financial planning concepts and questions I receive from clients that I believe are important. I want to start discussions about that will educate, benefit, and improve your financial life. Ultimately, to help you focus on your telos!

The recent government shutdown has been monumental for a number of reasons. For one, it was the longest in history. It was widely publicized and seemed to be in the news more than previous shutdowns. Some 800,000 Americans did not receive two paychecks as they normally did and many were required to continue working unpaid at the time. Many stories of those suffering from the missed pay have also been widely publicized. Those who ran out of cash, insurance, or otherwise faced a hard time were put front and center in the news.

What can we take away from this?
I think there are a few key financial strategies that could have helped mitigate the pain these folks felt: having an emergency fund, budgeting, and big picture financial planning.

Emergency Fund
Having an emergency fund would have helped lessen the hardships these families experienced. An emergency fund is a liquid, conservatively invested, savings account that is designed to only be used in emergencies. An emergency fund is one of the first pieces I recommend having in place before talking about any other savings. Maybe you need one, maybe you don’t, but you need to review your financial situation and make an informed decision for your family whether or not you need one.

What’s an appropriate emergency fund for me and my family?
That depends. . .there are myriad rules of thumb online about what you need for an emergency fund. Essentially, first, you need to know what it takes to run your household in after tax dollars on a month to month basis. For this discussion, let’s say it’s $4,000 per month to pay bills, loan payments, mortgage, car payments, phones, groceries, gas, utilities, daycare, credit card payments, and any other mandatory bills you have to run your household. I think a safe guideline is if you have one gainfully employed adult, six months of expenses, if there are two working adults, three months. So for a one income household using this rule of thumb, you would need $12,000 and for a two income household you would need $24,000 in a safer investment vehicle.

The right amount you need in your emergency fund account depends on a lot of factors. Some things to consider include risk tolerance, other savings & investment accounts, if you have others dependent on your income, your ability and time get a job if you were laid off, and do you and your partner work for the same employer/industry where you have a higher likelihood of becoming unemployed at the same time. It’s an individual decision, but you need to review your situation or consult a financial professional to determine what’s appropriate for your situation.

Budgeting
Budgeting would have helped these folks for a few reasons. Primarily, as mentioned in my previous point, it would have given the basis to calculate and make an informed decision about an appropriate emergency fund.

Another benefit to having a budget is that you know where your money goes, so you can more easily make decisions about frivolous expenses to cut immediately in an emergency because everything is plainly laid out in front of you. Having a budget and working it long term also helps you make sure your spending doesn’t get out of control with your income, so you can afford your expenses.

For example, if your housing expense (rent or mortgage payment) is 60% of your income, you would be in a much more difficult position if your income stopped, versus the normal recommended level of less than 25% of your income. Keeping your budget in line through a lifetime of wise financial decisions leaves you in a great place if you come to a tough place financially.

Financial Planning

Lastly, financial planning. . . Any financial plan worth its weight in salt would be sure to cover these two areas to some degree, but there are a few additional benefits that apply here. First, you could update your plan and make informed decisions about your long term financial situation. Do you reduce certain expenses? Do you borrow from another account to cover expenses? Do you forgo some other goal or change some goals to adapt?

If you work with a financial planner in developing your plan, it would be a great time to review your situation and get some independent advice about what is best for you. That’s part of why you work with a planner.

Conclusion
To sum up, the government shutdown reiterated why financial fundamentals are so important. Having an emergency fund, budgeting, and working an active financial plan are some of the base concepts that probably would have helped a lot of families make their way through the recent government shutdown. These are some of the core building blocks families should consider and review the appropriateness in their financial life.

If these base blocks are evaluated appropriately and put into practice, they are meant to help with situations just like this. They are the unplanned bumps in the road that many will inevitably drive over. These three pieces can be your spare tire when that flat tire happens. Do you have yours? Contact me today at dennis@telosfp.com to review your financial life and to create a long term plan to your goals.

Telos Financial is a Michigan’s financial advisor for Generation X, Millennials, Xennials, & young professionals. It is a fee based, holistic financial planning firm located in Plymouth, Michigan serving young professionals and families. Dennis LaVoy, CFP®, CLU® founded Telos to provide financial planning uses his experience, knowledge, and expertise to help families and individuals in Ann Arbor, Detroit, surrounding areas, and across the country achieve their financial objectives.

The views expressed are my own opinions and do not apply to every situation. Your situation may vary so make sure to consult a professional for advice prior to making any decisions.