As Investment Counselors, my colleagues and I are immersed in the world of financial rules and systems. Whether we are studying the investment markets and accessing trading platforms, dealing with our custodial partners, connecting with our clients’ banking providers, or strategizing with related professionals from the legal, accounting and insurance fields, we coordinate this complex financial web as fiduciaries in support of our clients’ needs. With ever-changing regulations and jargon that seems to take on a life of its own, it’s no wonder that we all know someone who would rather depend on a family member or trusted advisor to manage their financial household for them.
"...we all know someone who would rather depend on a family member or trusted advisor to manage their financial household for them."
This article is for all of you who nodded yes at the end of the previous sentence, especially if the “someone” mentioned is you. If you are not currently the financial head of your household, chances are very high that you someday will be.
"If you are not currently the financial head of your household, chances are
very high that you someday will be."
That may feel daunting, but you don’t need an advanced degree or years of experience in the financial field to be prepared. There are steps each of us can take to give ourselves peace of mind knowing our financial households are in order. What follows is a checklist of sorts – the questions whose answers will help maximize your financial preparedness and well-being.
KNOWING WHAT YOU OWN
Step 1:
Understanding what you own and how you own it is a critical first step. Perhaps the easiest way to tackle this project is to gather the statements for financial accounts which are sent to you by your banks, your investment custodians, your credit card companies, your pensions, your insurance brokers. These may come in the mail or by email or require you to log into your account to download the latest information. Once these are gathered, create an inventory list – either in physical form or in a password-protected electronic spreadsheet – that lists these institutions and the accompanying account or policy numbers.
Step 2:
Review each of these accounts to make sure you know their purpose and how they function. Specifically:
1. How is the account titled? For example, is your checking account a joint bank account where another signer can be added if/when assistance is needed, or is it a trust account which will require additional legal steps to add a signer beyond the original trustees?
2. For married couples, are both Social Security numbers associated with your accounts, if appropriate? Understand if both spouses are joint owners on the account, or if one is an owner and the other an authorized signer. For example, many credit cards allow for additional card users while the account is dependent upon one owner. If the owner is deceased, the account closes.
3. Are the beneficiaries for these accounts up to date? Is a trust named as the beneficiary on any account? Is that still the best solution?
4. For married couples with pensions or annuity payments, do the payments last for a single life or do they cover both of you?
5. Do you know how your real estate, if any, is owned? When was the last time you checked the title on the deed? (Hint: what does your property tax bill say?)
6. Do you own life insurance? Have you reviewed the policies lately? Has the reason to own insurance changed?
This list is not meant to be exhaustive, but it is a great start to getting your arms around your financial household. The answers to these questions may be the trigger for a deeper discussion with your family and members of your professional financial team.
PROTECTING YOUR FINANCIAL WELL BEING
A place to start is with your FICO (Fair Isaac Corporation) score. This credit score is one measure of your financial well-being and is based on information collected by credit reporting agencies. Most banks and many smart phone apps can provide easy access to your credit scores. Knowing these scores and checking them regularly is a great way to keep tabs on current account and loan activity or, for security purposes, to be alerted to new accounts or loans that have been opened using your information. Spouses should track their own credit histories. It is not uncommon for married couples to build credit based largely on one social security number, possibly limiting future financial options for a surviving spouse with a poorer credit score.
“Each of us has a personal definition of risk – the things that keep us up at night.”
To have a sense of “well-being,” it is important to understand what puts our well-being at risk. Each of us has a personal definition of risk – the things that keep us up at night. For some, it may be outliving health (mental or physical); others may be concerned with outliving wealth; many worry about the legacy they will leave behind when they are gone. When there is a financial aspect to these concerns, there are often steps that can be taken to help mitigate the worry.
To the extent that risk to your Financial Household is associated with not knowing if you have the financial means to live the life you hope to live, here’s a checklist of questions to ask yourself:
1. Do I understand the cashflows in and out of the household accounts? What direct deposits and/or automatic payments are in place? Which accounts are affected?
2. Do I understand the overall Household asset mix? How much of the Household Net Worth is in liquid assets (easily converted to cash) and how much is illiquid?
3. Have I considered the tax consequences of future cashflows based on the overall asset mix?
4. If I am earning an income, do I have an emergency fund in place in case that income is disrupted? Should I consider an emergency fund for other purposes (such as self-insuring against catastrophic events)?
5. What kind of insurance protections do I own?
- Health Insurance
- Property and Casualty
- Liability insurance
- Disability insurance
- Long Term Care Insurance
Do I have the right amount of insurance based on my definition of risk?
“Life events have a way of changing our attitudes towards risk and your plan for protection will evolve with these changes.”
As is evident by the personal nature of these questions, there is rarely a single “right answer” or approach to mitigating risk. It is also important to revisit these questions (and previous answers) from time to time. Life events have a way of changing our attitudes towards risk and your plan for protection will evolve with these changes.
THE IMPORTANT CONVERSATIONS – SHARING THE PLAN
Putting your financial household in order requires knowing what you own, how you own it, why you own it, and what steps you’ve taken to protect it. But it does not end there. A well-ordered financial household is understood by those who share it - your spouse, your children, your trusted contact, your successor trustee - by the people in your life, other than yourself, who will benefit most from your efforts to create the order in the first place.
These are the important conversations, and the questions to ask yourself may be used as conversation starters.
“Putting your financial household in order requires knowing what you own, how you own it, why you own it, and what steps you’ve taken to protect it.”
For example, we are often asked about reviewing the family trust with family members, especially adult children. This conversation can be limited to the structure of the trust (“what happens if…?”) or may include a full disclosure of all the assets of the estate. The timing and manner in which this happens is a reflection of your personal financial household culture, but in our experience, questions left unanswered directly allow for assumptions and inaccurate information to take hold.
“Our encouragement is to use the balance of this year to engage members of your financial household by sharing the plan.”
Our encouragement is to use the balance of this year to engage members of your financial household by sharing the plan. A well-ordered financial household is built on knowledge and understanding – both at the individual level and at the household level. As always, don’t hesitate to speak with your Investment Counselor if we can be of service with this effort.
Download Article: Finding Peace of Mind with a Well-Ordered Financial Household
The above information is for educational purposes and should not be considered a recommendation or investment advice. Investing in securities can result in loss of capital. Past performance is no guarantee of future performance.
