The Importance of an Orderly Financial House

Outside of the financial sector, many individuals feel uncomfortable discussing finances, whether it’s their day-to-day-budgeting or longer-range investments.

Certainly, there is no shortage of commercials showing clients having a wonderful time talking about their investments with their advisors and others or reveling in the independence of online trading. Sometimes they are happily – with an almost evangelical fervor -- discussing the advantages of robo-advisors. However, in my experience many individuals would rather discuss almost anything else. That is certainly understandable, given the implications of having more-or-less money than others in the conversation, an element of ‘me-too-ism’ in some conversations, or simply a discomfort at discussing something so personal. That discomfort is generally not a problem in itself but becomes a problem when it extends to postponing attention to the details.

Choosing whether to share such information is certainly one thing, but there are some solid reasons for getting your financial house in order, keeping it intact and doing everything possible to improve it.

At the top of my own list is the compelling belief that the equation between the government and the individual is going to change over time. I would argue that the national debt of various countries makes one of three future outcomes likely: we will get fewer benefits from the government in future; we will have to pay more in taxes for what we do get; or we will face an unwelcome or unexpected combination of the two.  

Without some change in the above equation, it is questionable whether current levels of health and social spending can continue, much less absorb the added costs that will accompany an aging population in which adults live longer, need more and expect more.

Connected to the same aging demographic, we had not even heard of ‘longevity risk’ until about 10 years ago.  Put simply, it refers to the possibility that since we are living longer, we could outlive our resources. Popular lore, (though untrue) is that German Chancellor Otto von Bismarck set 65 as the age at which citizens would receive social benefits because he figured many would not live that long. Thanks to modern medical advances, lifestyle improvements and factors such as the reduction in smoking, many will outlive that threshold and will need their resources to ensure a healthy and comfortable life.

Changing work styles mean that we no longer automatically stop working at age 65. In some cases, early retirement is thrust on an individual due to company staff cutbacks. Also, an individual might choose to work past 65 because he or she enjoys their profession or must do so out of economic necessity.

As discussed in a previous edition, impending retirement presents another series of financial considerations, as does sudden termination by an employer or a decision to move into a second career.

Also on the list is the increasing complexity of financial products, which started with the explosion in mutual funds several decades ago.

Next on the list is the question of advisor fees as television commercials extol the virtues of using robo-advisors. Apart from the costs involved, the question itself adds to the confusion. Can – or should – an individual ’go it alone’, aided only by a robo-advisor, and to what extent? In whole or in part? Do the complexities discussed here skew the argument towards professional advice?

Changing family situations enter the picture. The aging population means that more of us will have elder care responsibilities. For some, that may mean an extra stress placed on their financial situations.

The implications of keeping your financial house in order extend after death.  Unclear provisions in a will, or an outdated will that does not comprehensively reflect the deceased individual’s assets, liabilities and wishes, can lead to rancor or worse among beneficiaries. The situation becomes further complicated in the event of serious illness, divorce, separation or a second marriage and an extended family. Each of those situations requires sound planning based on wise financial advice.

Keeping the financial house in order can be a chore – but a very necessary one.

Related: Getting on a Glide Path to Prepare for the Big Day of Retirement