Financial Planning Provides Breathing Room

Investing
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By Matt Buckwalter

Learn more about Matt on NerdWallet’s Ask an Advisor

Breathing room. Too little of it may create panic. Enough of it allows us to relax.

Financially speaking, breathing room means a well-balanced plan for enjoying today and saving enough for tomorrow’s goals. It means living with what is enough — matching spending to income with room for savings and the unknown.

The challenges in creating financial breathing room include knowing how much to save and dealing with financial distractions that make saving difficult.

As an example of today’s financial distractions, health care costs have entered a new stage in public awareness. The full implementation of Obamacare is entering its second year, with open enrollment wrapping up this week.

Here in Nebraska, one of the primary health insurers has failed and is no longer a viable alternative, resulting in a scramble to replace coverage. Another large insurer is waging a public battle with a major health care provider over costs, which has limited health care choice.

In addition, employers are shifting more health care costs to employees, and marketplace premiums for individual and family coverage are sizable, even with premium tax credits for those who qualify. It’s also difficult to know what health care costs will be in the future.

With these and other financial distractions and uncertainties, how does one plan?

Although we cannot foresee the future, making a plan using the information we have is more likely to get us to our goals than not planning at all.

Even more important is revisiting the plan to confirm and revise facts as we move through life. It’s our rudder that keeps us focused on our goals as life’s currents try to move us in the wrong direction.

When it comes to the cost of health care, we know what it costs today (take a look at your pay stub). We can assume this will be a large piece of our budget today and tomorrow. Because of this, it’s worth setting health care savings as a financial goal in itself, one that receives special attention. For today, we can use our current costs as a starting point for planning. For tomorrow, we can look to what retirees are spending today on health care and plan for similar inflation-adjusted costs in the future.

As an example, HealthCare.gov provides real information about insurance premiums, co-pays, co-insurance and deductibles for health plans in today’s marketplace. To plan for an early retirement at age 55, dive into this website to see what it tells you about costs for someone at your planned retirement age, and use these real numbers in your planning. Although you may only be, say, 40 years old now, you have a solid planning number for health care costs when you reach 55.

The key is to follow up in a year to see what’s changed and ask yourself how your personal health might factor into the planning. We might find that our assumptions were too aggressive and that we are saving more than enough. Conversely, we might discover that we need to save more. We follow this process throughout our lives, making adjustments to keep us on track.

It’s worth noting that this same reality exists for other important elements of our finances, including retirement benefits like Social Security and employee pensions; income tax rates; changes in personal income; changes in family situations; and the reality of investment returns.

Careful planning may seem like a rational approach, but I’m sure some believe it’s not worth the effort, rationalizing that it’s too difficult or not worth the time. They figure that life is too busy and that setting time aside to figure this out is difficult, time-consuming and a challenge, especially since the outcome is so far in the future. Some of these people will do fine, but I’m a fan of being proactive and doing whatever possible to produce a desired result.

In Stephen Covey’s book “The 7 Habits of Highly Effective People,” one of the habits is “Putting First Things First.” It’s the habit of making time for that which is important but not urgent, and which is likely to have the most fulfilling impact. These priorities often are hardest to put first because of the distraction of the urgent. Having and maintaining a financial plan leads to financial breathing room — and leads to simply more life!