Financial Planning Do's & Don'ts in Today’s Economic Crisis

Financial conditions, including the current economic crisis, directly impact your quality of life as well as the life decisions that you must make in financial planning. However, the impact of past financial conditions should take a backseat when looking realistically at today and the future. Your choices must be based on "what is," not "what was." I wish I could promise you that your financial rose garden will return to the levels of 2007 quickly, but the truth is it could take years.

This Economic Recovery Is Likely to Be Different

Yes, the stock market has indicated reaching some kind of bottom, the probable slowing or stopping of the deterioration. The government stimulus seems to have stopped us from the scary potential collapse, but the type of recovery (i.e., strength, duration and consequences) is still unknown. Most economists and financial advisors seem to feel that the recovery will be very uneven across different sectors, relatively anemic here in the US, and that it could come with possible inflation repercussions from the excessive worldwide government stimulus and our historically high debt. The question is: how does that affect your financial decisions today as well as your potential needs in the future?

Do Think Rationally

Most people tend to respond to their finances on an emotional level rather than a rational (i.e., "become knowledgeable" or "get help") level. A clear perspective is key when evaluating all options. When financial planning, and making important financial decisions, think about the whole picture. Doing so will help you assess all of the alternatives and their variables as they could apply to your circumstances.

Don't Make Shortsighted Financial Decisions

The traditional safe income options are presently yielding very low returns, which forces many people to make beneficial but shortsighted financial decisions as they reach for yield and safety, and which later comes back to cost and hurt them. This type of shortsighted decision-making is prevalent despite there being a strong possibility that rates will rise and a possibility of increased inflation down the line. You may want to look at longer-term alternatives or a make a few minor adjustments so that you have income as well as protection in these rapidly changing economic conditions.

Retirees struggle with their cost of living inflation rate because it usually exceeds the general public's consumer price index (CPI), their income (e.g., Social Security benefits) and the returns (e.g., CD rates) they can obtain on their conservative investments. In addition, seniors' rapidly increasing health care and personal costs which they frequently have to assume themselves makes their living expenses and inflation rate significantly higher.

In trying to meet the ever-growing income/expense gap it becomes more and more difficult for those who are struggling to get by, eventually forcing portfolio liquidations or other undesirable life changes. In considering your objectives and needs, what are your priorities? How do you determine your best options? How do you balance your needs and resources with your desired quality of life and all the choices available? Are you able to objectively weigh the benefits and risks to provide for the best overall results?

Do Seek Professional Help with Financial Planning

I know you are scared, especially after the economic crisis this past year and the present economic conditions, but in order for your financial garden to flourish again, it requires looking forward, considering getting expert help, and looking further than today.

I can't emphasize enough that you must be very careful about who you receive financial advice from. Check out that person's credentials and experience, and understand where their interest lies (e.g., are they paid on commission?). Even if you've been taught to trust your local banker, make sure you understand whether their fiduciary responsibility lies with their company or with you.

The future is looking very different—have you considered what may require adjustments? The unknown in life can be scary, but putting your head in the sand, responding from a backwards perspective and hoping for a return to the past will not make it better. You must incorporate future variables into your present financial decisions.

Posted in Financial Planning for Retirement, Handling the Economic Crisis