When you're making a big financial decision, it's easy to look at that decision by itself.
Should I sell these investments?
Should I pay cash?
Should I borrow?
The problem is that those decisions don't happen in a vacuum. What you do in one area can affect something else down the road.
That's how I approach financial planning. Before we make a decision about an investment, I want to understand what else is going on in your financial life. What expenses are coming? What cash will you need? Are there taxes we need to account for? And if we make this decision today, what does it change six months or a year from now?
Here are five conversations worth having before making some of those decisions.
1. How Are You Going to Pay a Large Tax Bill?
A large tax bill can create a decision that isn't as simple as writing a check.
You may have enough cash to pay it, but using that cash could leave you with less available for other needs. You could sell investments, but that may create additional tax consequences. You could borrow, but then you're paying interest and have to have a plan for paying it back.
When I'm helping a client work through a large tax bill, I don't want to look at the tax payment by itself. I want to look at their cash reserves, investments, upcoming expenses and when their income is coming in.
Before you figure out how to pay the bill, figure out what the payment is going to do to the rest of your financial plan.
2. What Will Your Retirement Income Look Like Month to Month?
A retirement plan can look great on paper and still leave you wondering how you're going to pay the bills each month. That's because having enough money and knowing how to use it are two different things.
You may have Social Security, a pension, a 401(k), an IRA and other investments. The question is how those different sources will work together. Which accounts will you use for regular expenses? How will you handle a large purchase? How much cash should you keep available? When should you start taking income from different accounts?
When I'm helping someone prepare for retirement, I want to get those decisions figured out before they need the money. The goal isn't just to know how much you have. It's to know how that money is going to support you once the paychecks stop.
3. Does Your Cash Have a Purpose?
Having money in the bank isn't necessarily a bad thing. In fact, having accessible cash for emergencies and near-term expenses is important.
But I think it's worth asking a simple question:
What is this money for?
Maybe it's your emergency fund. Maybe you're saving for a home renovation. Maybe you know you'll need it for taxes or another large expense. Or maybe you've accumulated a large cash balance without really deciding what you want it to do. Cash that's needed next year has a different job than money you're investing for retirement 15 years from now.
When I'm looking at a client's cash, I don't automatically assume they have too much just because the balance is large. I want to know what that money is supposed to do first. Once we know that, we can decide how much needs to stay readily available and whether the rest should be doing something else.
4. How Are You Going to Pay for a Major Purchase?
A new home, renovation, education expense or business investment can require a significant amount of money.
The first question is usually, "Can I afford it?"
But there's another question that's just as important:
"What's the best way for me to pay for it?"
You could use cash. You could sell investments. You could borrow. Or you could use some combination of those options. Each choice can affect your taxes, cash reserves, investments and future cash flow differently.
The purchase itself may be completely reasonable. The question is whether the way you pay for it makes sense with everything else you're trying to accomplish.
5. What Do You Expect to Need Money For Over the Next 12 to 24 Months?
Most financial plans spend a lot of time looking years into the future. That's important. But I also want to know what's coming in the next year or two.
Maybe it's college tuition, a new car, a home repair, insurance premiums, helping a family member or a change in your income. Maybe you're planning to sell a business or retire in the next couple of years.
Knowing those things are coming changes how I think about the money you have today. Money you'll need soon doesn't necessarily belong in the same place as money you're investing for the long term.
The Investment Account Isn't the Whole Story
Your investment account is only part of the picture.
That's why I don't think every financial question should start with, "What should I invest in?"
Sometimes the better question is, "What's coming, and how are you going to pay for it?"
At E.P. Wayne Financial Group, we help individuals, families and business owners in Columbia and surrounding communities make those decisions with the rest of their financial plan in mind.