Surviving a Financial Calamity, Part 3: Financial Plan Gone Awry

In the first two parts of this series, we covered strategies to recover from two undeniable financial calamities: bankruptcy, and medical malpractice litigation. Even if you’ve never faced either of those situations, they are easily recognizable as significant financial hardships to overcome.

But a financial plan gone awry? How does that even belong in the same paragraph, much less the same series of articles? The reason is that while a financial plan gone awry seems at first like a minor setback, the truth is missteps in planning are insidious and nefarious: they sneak up on you, derailing your plans, preventing future plans, and potentially leading to a series of outcomes that contribute to you not reaching your financial goals.

And this problem is much more common than filing for bankruptcy or facing malpractice litigation. So let’s take a look at the most common things that derail your financial plans, and how get back on track once you’ve gotten off.

Broken Budget

Most people who want to stick to a budget think there’s something wrong with them if they can’t stick with their budget. What they often ignore is that it’s more likely that something is wrong with the budget. Look, you know whether you’re a budget person or not. If you are, but you’re still not making it work, consider where your budget is breaking down. It could be a result of overestimating income, but most likely, it’s a result of not accounting for miscellaneous expenses each month. “But that car repair was a one-time only thing,” you may say. Next month, though, another expense creeps in.

Get back on track: I’m making this statistic up, but I would venture to guess that somewhere between 95% and 100% of budgets that work include a fairly large allocation for “miscellaneous expenses.” Take a three-month period and keep track of this category, even if you don’t budget for it. After that, you’ll start to budget for it. You can thank us later.

Underperforming Investments

Earlier this year, we wrote about one of the weak aspects of what is generally a strong investment principle: diversification. As we noted in that article, diversification is not a growth strategy—although it can lead to growth and protect growth. It can also inhibit growth, because growth in investments that perform really well in certain economic cycles may mean less growth, and perhaps even declines, in other investments.

It’s still a very good idea to have a diversified portfolio, but it’s also a really good idea to review that portfolio very frequently to make sure it’s performing optimally. It’s a good idea to work with a financial professional if you’re so inclined, because even if your portfolio is performing well, you may not know how it’s performing against other vehicles that you could consider. Always keep in mind, though, that your goals with retirement investments should be long-term; overreacting to short-term losses has hurt more portfolios than simply leaving an investment vehicle to go through some market fluctuations.

Get back on track: If you have investments that are repeatedly underperforming, consider making some adjustments to your portfolio. Again, don’t overreact to a quarter or two—and sometimes even more—of underperformance. But sometimes, if it looks like a lemon and smells like a lemon, it’s a lemon.

Where art thou, contingency fund?

Like miscellaneous expenses, the lack of a contingency fund is an underrated factor in many financial plans that just don’t work. Why? Because funneling a portion of your investment income into a contingency fund has a positive overall impact on longer-term savings. If an unexpected expense or a short-term dip in income from dental services should present itself, you can tap your contingency fund instead of siphoning off other investment income.

Get back on track: The contingency fund is a great thing to have, but it’s not a cure-all. Contingency fund vehicles, such as money market funds and certificates of deposit, are designed to straddle the line between liquidity and potential investment growth.

Make sure you are using your contingency fund as intended, and not as a long-term solution to a budget shortfall. If you find yourself raiding your contingency fund more often than you’d like, consider making adjustments in other areas of your budget instead.

A Last Word

Investor inertia is a very real thing. Objects in motion tend to stay in motion, and objects at rest tend to stay at rest. Financial plans that are humming along will likely continue to do so, with little touches of maintenance here and there. But those that come off the rails need immediate and lasting attention. It’s never too late to get back on track. Before you know it, you’ll be humming along again.