How Much Flexibility Is Too Much In Your Financial Plan?

PretzelWhen it comes to your financial plan, it is important to maintain enough flexibility so that your plan can accommodate unexpected events that are out of your control. On the other hand, a sound financial plan needs to be firmly grounded by factors you can control so that even in the face of unexpected events, your financial plan can still get you to where you want to be.

Fortunately, women are masters when it comes to balancing planning and flexibility!

When you develop a financial plan, you have to make certain assumptions. Many of the things that can most affect your finances are out of your control or difficult to predict (like a job loss, illness, or receiving an inheritance after a parent passes away), which is where the flexibility comes in. Even with all the surprises life has in store for you, you can still make sound financial predictions.

Taxes – The notoriously complicated U.S. tax code will affect your financial plan in a number of ways. For one, your effective tax rate will change as your income changes. Also, changes to the tax code itself can affect your financial plan, often dramatically. Fortunately, changes are typically made every year; and because Congress sets tax policy, most changes in the tax code are announced in advance of taking effect – allowing you time to plan how those changes might impact your financial plan.

Income – We all hope, of course, that our income will rise as we move forward in our careers. Typically, those kinds of income changes are predictable. More dramatic yet still predictable income changes can happen when one spouse voluntarily stops or starts working.

Health – Your health and the health of your spouse are significant factors in your financial plan for two reasons. First, because health is a big determinant of one’s ability to earn income; and second, because healthcare costs are often one of the largest expenses, especially for older people. As you age, it’s important to think about changing your assumptions about your health. You might want to reduce your expected income, because you won’t be able to work long hours. Or you can increase the healthcare-related expenses you plan for. A strong health insurance plan can help you avoid catastrophically high healthcare costs in the event of a major injury or illness.

Major Life Events –Whether it’s good or bad, expected or unexpected, events like marriage, the birth of a child, divorce, a spouse’s death, or a relocation will affect your financial plan. Some you can plan for, some you can’t; the point is to be aware that these kinds of events will impact your financial plan.

The Economy – Wouldn’t it be nice if we could count on the economy to return a regular amount each year, so we knew exactly how much to save in order to retire on time? After the last ten years, we all know better. You might not be able to control the economy, but you can diversify your investments so a big dip in the market won’t wipe out a large chunk of your savings.

You can’t predict the future, control the economy, or simply hope that illness won’t strike. All you can do is create a plan based on sound logic and build in flexibility to help you adapt as your life changes. The number one key to achieving your financial goals is to review and, if necessary, revise your financial plan regularly – at least once a year. That way, you can make adjustments for all the factors that have changed for better or worse. Life is an adventure. We hope you enjoy yours and that your financial plan allows you to live your life to the fullest.

For more great advice on saving and investing for women, visit our article archive.

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  1. […] By Candace Bahr, CEA, CDFA and Ginita Wall, CPA, CFP® […]

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