Sometimes things really work out. When that happens, people can find themselves way ahead of schedule on their financial plan. If this happens to you does it mean you should kick back and coast? Should you increase your spending or cut back on saving? Or should you continue spending, saving and investing as if nothing happened?
This may seem like a problem you would just love to have; right? Who wouldn’t? While it certainly is cool to be in front of the money curve, this situation serves up (potentially large) opportunities you might overlook if you aren’t paying attention. This recently happened to a couple I know.
Marie and Ned have been married for almost 15 years. When they started they had nothing but good financial habits and patience. (Turns out, that’s all they really needed.) They ran some projections when they were in their 30’s (10 years ago) and expected to have enough to make work optional by the time they reached age 60. They were fine with that prognosis at the time.
But when Marie and Ned revisited their numbers recently they realized they were 10 years ahead of plan. It was clear that barring a financial catastrophe, they will probably hit their ultimate goals in their 50s rather than in their 60s. Jolly good.
This is indeed a peachy situation. But if you find yourself in Marie and Ned’s shoes there are a few questions you need to answer before you quit your job and start living the life of Nick Cage.
1. Are you really ahead of schedule?
Of course it’s wonderful if your financial situation strengthens faster than you anticipated. But it’s important to re-evaluate and be sure. Take a look at your spending. Has it increased also? How much will you be spending when you retire? Your assets might have increased faster than you thought they would. But if your spending also increased you might need more money when you retire than you projected at first. This is one reason I like people to re-run their projections annually.
2. Why Are You Ahead Of Schedule?
I don’t want to look a gift horse in the mouth but it is really important to understand the reason for your success. Are you ahead of the game because you saved more than you expected to? Did you get promoted at work quicker than planned? Did you inherit some sweet dough-re-mi? Did your investments outperform?
Here’s why this is so important. If you are ahead of the curve because of something within your control (like saving more than planned) you have an amazing opportunity which we’ll get to shortly. But if you are at the next level because your investments did really well you have to tread lightly. Don’t misunderstand me please. This is wonderful.
But things have a way of evening out. Sometimes outsized performance reverses itself. If my financial situation changed dramatically because my investment performance was off the hook, I’d re-evaluate to see if my portfolio had too much risk and maybe ratchet it down a little.
If I determined that my risk level was still appropriate, I’d probably go about my life without changing much. I would continue to monitor both my investments and my financial projections. Once I reached my ultimate goals, I might take action at that time. Otherwise, it’s back to business.
3. Should You Spend More Now or Later?
If you are ahead of the game because you earned more and/or spent less than planned, you are in an enviable position. First and foremost, you have great financial habits and that is your greatest asset. The odds of suddenly finding yourself in financial straits are remote.
At this point ask yourself if you feel completely satisfied with your financial life. Would you be happier if you spent a little more or worked a little less now? Alternatively, if you could retire or make work optional sooner, would that be more meaningful to you? What if you could have more money to spend when you retire? Is that the most important thing?
Remember, you have to do anything differently. But knowing that you are successful and have options is empowering. And seeing this in black and white will absolutely put a little extra spring in your step.
What would you do if you were ahead of schedule on your financial plan?