Are you planning on having kids?
Do you want to buy a home?
Is a job or career change in your future?
Those are just a few examples that involve huge changes in your life, especially when it comes to your finances.
Rather than just hoping you can handle the upcoming changes, you can find out in advance whether or not you will survive financially by following one simple scenario.
Pretend the life-changing event already happened.
If you want to make sure you'll be able to handle a big life change, simply pretend the life change already happened and stress test your finances.
What exactly do I mean? Here's an example.
Pretending you already bought a home.
One of my three easy ways to help save for a down payment is pretending you have a mortgage.
For this example, simply calculate how much you think your mortgage payment will be and save any amount that is in excess of your current rent payment.
While the above is a great way to save for your down payment, it won't give you the full financial picture of owning a home. You'll need to make sure you also are setting aside money for all of the new utilities bills you'll have to pay as well as money for home maintenance.
A rule of thumb for how much home maintenance will cost is one to two percent of the home's value. If you can successfully set aside enough money for the new mortgage payment (which will include an escrow account for property taxes and insurance), home maintenance and new utility bills, you probably can afford to make the major life change.
Of course, you will still need to make sure you have enough money for that down payment and closing costs.
You can pretend with almost any life change.
Don't just limit this exercise to the idea of buying a home. If you plan on changing jobs, or even careers, that will result in a lower income, simply forecast your estimated new salary and take home pay. Then stress test your finances for a few months and see if you could make things work on that income today.
Planning on having a child and want a parent to stay home with your new baby? Run the numbers and try living on just one income while still setting aside money for new baby expenses to see if it will work.
These exercises are extremely powerful because you can see what problems you'll run into before you run into them. On top of that, you won't have made any life changing decisions that cannot be undone by pretending before you make the change.
Instead, you have time to change your mind or come up with solutions before running into an emergency situation. Whether you find out you'll need an extra $500 per month to make things work or you decide to buy a cheaper home instead of a more expensive one, you will have options rather than being boxed into a corner.
You may figure out that you can earn that extra $500 by mowing a few lawns in your neighborhood four times per month. If that's the case and you're willing to do that, then go ahead with the plan.
However, if you can't come up with the extra $500 on a consistent basis you'll know to come up with a plan B if you're going to move ahead anyway.
The biggest benefit of pretending.
In almost every case you will end up with more money in the bank after running this exercise than when you started, which is my personal favorite benefit.
Rarely do people worry about a future scenario that involves earning more money, so most of the exercises run will require you to save the extra money you avoid spending while running each scenario.
This extra saved money will put you in an even better position to make sure that your new life after the big change will be financially successful.
You can use the money to help pad your down payment savings, increase your emergency fund, to pay down debt or as a way to pay for the hospital bills for your new child. So, in addition to knowing you'll be just fine financially, you'll have saved for your big event all at the same time. How awesome is that?
By Lance Cothern
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss.
Financial advisors at Gerber Kawasaki are registered representatives with, and securities offered through, LPL Financial, Member FINRA/SIPC. Investment advice offered through Gerber Kawasaki Inc, a registered investment advisor and separate entity from LPL Financial. Please consult your investment professional before acting on any advice.
Gerber Kawasaki Wealth Management, 2716 Ocean Park Blvd. #2022 Santa Monica, CA 90405. Contact us at (310) 441-9393.