Listener Abby is off to business school, and her financial life is turning upside down. But how do you reset your money priorities when your life switches gears? In this segment from Motley Fool Answers, Alison Southwick and Robert Brokamp are joined by Jason Moser, to talk about the ways you need to plan for big life transitions, and the changes you need to make when you go from socking away funds to living off of those reserves.
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A full transcript follows the video.
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This video was recorded on August 2, 2016.
Alison Southwick: It's time for Answers, Answers and today's question comes from [Abby] in Washington, D.C. She writes: "I'll soon be headed to business school and my question is about this new phase in my life. Do you have advice for someone whose finances are about to turn upside down? I'm going to transition from saving earnings to spending savings, and my new world will be very unpredictable and rife with situations where I have to assess whether a trip, special event, etc. is worth the extra cost. Any advice for how to set and keep my new financial priorities?" She also writes, "P.S. Alison, all clogs, all day here. Rock on!"
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Southwick: Rock on, [Abby].
Robert Brokamp: Rock on.
Southwick: I agree.
Brokamp: Well, every situation exemplifies an important financial planning concept, and that is life transitions are financial disruptions. Whether it's going to school like she is, or graduating from school, or sending your kids off to school, marriage, divorce, birth, death, job change, moving, retiring ... these will have some sort of impact on just about every aspect of your financial planning ... so from your taxes, insurance, income, expenses.
And you can understand a situation like [Abby], where she's a little freaked out, maybe, and wondering how all this is going to affect her future and her savings.
There's really only one way to handle that, and that is to come up with basically a three-to-five year financial forecast for yourself. I know that doesn't sound very exciting, but I can tell you I recently did it, myself, because I am also in the middle of a life transition. I'm moving at a point when I have two teenagers who will be going to college in a couple of years. I might have to get them a car. My youngest kid needs braces. So I figured the only way to really understand how all these things move together is to create a spreadsheet and map out the next three to five years.
What you'll find, [Abby] (and anyone else who's going through any major transition), is different ways that your expenses will change. For her, if she's working now but then becomes a student, her taxes are going to go down significantly. She's probably leaving her employer's health plan and doing probably the school's health plan. How does that change her expenses?
For us, when I was analyzing how my kids going to college will affect our expenses, obviously we'll have the expense of college, but I also will have the expense of saving for college going away. I also expect I will not be spending as much on food and utilities once the kids move out.
Brokamp: That's right. But besides just an average budget, you have a net worth component to this. For us, it was how much we saved for college. For [Abby] it will be just her savings. It will be helpful for her if six months from now she says, "I want to take this trip and it's going to cost me $1,000." She can put that into her spreadsheet and say, "If I do that, how does that affect my finances three to five years down the road? Am I OK or not?"
I think that's really the best way for her to handle the situation and anyone evaluating any major transition, especially people who are about to retire. But a job change or moving to a new location just about every aspect of your finances will be affected.
Southwick: It probably helps to look five years in the future, like you said, because also business school will have passed. Like this is a temporary, painful time for her, but in five years she'll be through it and she'll hopefully be making bank at some awesome consulting firm in D.C.
Brokamp: Exactly. I recently wrote an article about this, and one of the components that I think is important is get expert input. So for her situation, she should...
Southwick: She came to you, by the way. Sorry -- you're the expert input on this.
Brokamp: I'm so sorry, [Abby].
Southwick: Sorry, [Abby]. He's recommending finding other experts.
Brokamp: Right. But related to what you said about [Abby], she should have a realistic idea of how much she's going to make when she finishes school and be able to figure out, "If I do this over the next two or three years, how does that look three to five years down the road?"
For me, I sat down with our CFO, Ollen Douglass (former guest on our show) and said, "Where's the company going? What's a reasonable expectation for my income over the next three to five years?" Then I put that into my five-year forecast and said, "Given all that, I think we'll be OK with this size of a mortgage and that our kids probably will go to school." Probably.
Southwick: They're going to go to school.
Brokamp: They're going to go to school.
Southwick: All right, [Abby]. I hope you find that helpful and since you are in the D.C. area, if you ever find yourself in Old Town, feel free to swing on by. Just give us a warning, first, so we can roll out the red carpet.
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