As part of USAA’s Military Advocacy team, one of my responsibilities is to prepare our team to deliver financial readiness presentations to members.
A while back, I had the opportunity to listen to one of my teammates talk about “alignment.” Alignment is critical in all areas of our lives. If you’ve ever driven a vehicle with an alignment problem, you know what I mean.
Here are a few questions that could work as your own personal finance alignment test:
• Is your spending aligned with what’s important to you? Often, having a budget and budgeting is discussed as an end – something to have or do. In fact, carefully managing your income and expenses is a means to an end. What is it you are trying to accomplish? Maybe it’s paying down debt, buying a home, creating a comfortable retirement or providing for your kids’ education. Does what you’re doing with your money align with what you’re trying to accomplish? If the answer is no, it may be time to overhaul your spending (and savings) plan.
• Is your life insurance aligned with the reasons you have it? One of the most common life insurance questions I get is, “What type of insurance should I buy?” While insurance policies – especially permanent ones (whole life, universal, etc.) – can be confusing, my answer isn’t: Pick a policy providing coverage that aligns with the reason you’re buying the life insurance. In other words, coverage associated with needs that go away with time (debt that’s paid off, kids who become financially independent, retirement savings that are accumulated) is best covered with term insurance.
• Is your cash cushion aligned with your life? As a financial planner, the mantra is to have three to six months of expenses set aside for emergencies. Life is different for different people, and that’s where alignment comes in. A servicemember preparing for transition, or a dual-income military family where the non-military spouse’s income is geographically vulnerable, could choose to have a lot more cash than the planning principle would dictate. On the other hand, someone with more stability or wealth could elect for a smaller stash of cash.
• Are your investments aligned with your goals’ time horizons? The mythical one-size-fits-all “right” investment or investment portfolio is illusive. Each has a different set of goals, time horizons, tax situations and risk tolerances. However, perhaps the biggest check you can make when evaluating your own savings and investments is ensuring a clear linkage between the investments you select and the time between now and when you’ll need the money. The investments you select or portfolio you build for a savings goal two years out should look a lot different from those set aside for a goal 30 or 40 years into the future.
• Are you and your significant other aligned? It’s quite disheartening when a couple shares that one partner takes care of all the finances. It’s hard to work together – spending, saving and aspiring – if you’re not on the same page when it comes to your day-to-day and longer-term finances. Start talking about both.
J.J. Montanaro is a certified financial planner with USAA, The American Legion’s preferred provider of financial services. Submit questions for him online.