If $h!t Hits the Fan

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You have a good system going… Income is rolling in, spending is under control, bills are paid with online banking, investments are on autopilot and your net worth is steadily climbing.  Technology is allowing you to have access to the latest financial information 24/7, even if you do have to remember a few logins and passwords.  You feel in control of the financial shack/house/castle you have built.

I’ve been coasting down this financial HOV lane for a few years now making subtle corrections but never taking an exit ramp or hitting a rumble strip.  Sure, there were major life events along the way such as marriage and the birth of our son (with related expenses), but Financial Independence is still programmed into our GPS.  I’ve always remained the designated driver and recently started wondering what would happen if my wife had to take over the wheel.  (OK, I’ll stop with these car analogies).

I guess yet again the birth of our son was a kick needed to sit down and really think about the concept of continuity in the family.  When it was the two of us, I wasn’t too worried about what would happen if I were to check out of this world.  My wife has a job and can support herself just like she did before we got married.  Add kids in the mix and suddenly everything becomes much more urgent and difficult.  With that in mind I decided it was time to come up with the Plan for the worst case scenario (for me at least) and hence the title of this post.

Without the Plan, a situation where I’m no longer in the picture would seem financially overwhelming. We both know that my wife’s salary would not be enough to pay our current average monthly expenses. Yes, we do have an emergency fund in place and it would buffer the blow for a while.  But the problem is not only money, it’s also information.

If you live with a significant other, how sure are you that they would be able to quickly get access to what they need if you are (sorry) dead?  Do they know where your financial stuff is? Your logins? Passwords?  If you’re the one who always managed finances for the family, would they know where to even start?  From talking with my wife I knew she was ill prepared to handle anything of this magnitude. Combine with the fact that grieving families are often prime targets for all kinds of scams and no wonder I was worried.

And that’s how the If $h!t Hits the Fan Plan was born.  After putting the system together I discussed it with my wife so we are all on the same page.  Below you will find a high level overview with many details removed – I am posting it on the Internet after all.

  • Spreadsheet called “Finances”. Lists important accounts along with the actual step-by-step Plan. Wife knows where the document is and has secure access.
  • Spreadsheet called “Passwords”.  Lists logins, passwords, links, security questions and answers and other login related information.  Wife knows where the document is and has secure access.

Finances*

Lets look at the categories covered in the spreadsheet.  Under each category I list the account name, number and any applicable notes to help get a better picture.  For example, this account is not used and can be closed, this one has an automatic transfer to that one, etc.

  • Bank accounts.  Here is where to find our cash reserves.

  • Retirement accounts.  Here is where to find our retirement money, but don’t sell anything from here!

  • Brokerage accounts.  Here is where to find our taxable investments.  Could sell, but better to leave it alone!

  • Credit/Debit cards.  Lots of those due to sign-up bonus games I play. Here are the ones actually used and here is how to close all of them.

  • Insurance. Home, auto, motorcycle, rental condo, business.

  • Mortgage. Home, rental condo.

  • 529 college plan.

  • Family photo/video online storage.  All pictures are saved on the home computer but they are also backed up online at full resolution.

  • Other. Anything else that does not fit into the categories above.

Finally, we get to the actual Plan. Below is an edited version.  Unedited version has a lot more detail including account names and balances.  Here we go:

  1. Get access to all accounts by looking through the Passwords document.

  1. Our emergency money is (here) and some cash is always (in this bank).  If additional money is needed, can sell (this Mutual Fund) and/or sell shares from (this brokerage account) and transfer that money to (this bank).  Between these accounts you should have (at least 1 year of living expenses) readily available.

  1. Sell the house.

  1. Pay off the condo if you will move in there.  Or if you want to live somewhere else, sell the condo and buy a small place in cash or just rent.  Don’t spend more than $200K on the new condo/townhome (this buys a nice 2-3 bedroom place in a good school district here).

  1. Take the remaining equity from the house sale and invest into Vanguard Brokerage account: 60% into VTI (stocks); 30% into BND (bonds); 10% into VNQ (real estate).  This will be your Brokerage Portfolio.  This is different from your Retirement Portfolio (like your 401K) discussed below.  You can invest online yourself but it might be better if you call Vanguard to guide you the first time.  If ever in doubt, call them first!

  1. You will do all investing yourself online through our account at vanguard.com.  Do not give any money to advisers.  You are the only one who will truly care and you will learn as you go.  Investing into Brokerage account funds as stated above will generate dividends. Vanguard is the company that gives you lowest cost funds and will be your investment company from now until you pass. There is no need to use anyone else besides whichever company your current employer is using for 401K.

  1. You can use dividends from Vanguard BROKERAGE account to supplement your income, but it is best to just let Vanguard automatically reinvest them to buy more shares automatically.  The goal is to NOT sell any shares and let it accumulate.

  1. You will need to re-balance the Brokerage portfolio to get back to 60% stocks, 30% bonds, 10% real estate allocation.  Once a year (maybe around your birthday) is good.  It’s easy to learn to do it yourself online, but you can call Vanguard and they can guide you the first time.  As you learn about investing you might want to change the allocation to be more aggressive (more stocks) or more conservative (more bonds) but 60/30/10 I set up is a good mix as is.

  1. Concentrate on spending less.  Every dollar you save is much more than a dollar earned.

  1. Trade your car in for a 3-5 year old used, fuel efficient Honda or Toyota.  Sell the other car/ motorcycle and cancel insurance on those to get some of the premium back.

  1. Money I saved up in my Vanguard Retirement accounts is your Retirement Portfolio and you should not touch this money until at least 59.5 years old to avoid penalties.

  1. Markets will go up and down but you will NOT sell any shares from your Brokerage or Retirement portfolios. This is a great time to buy more shares cheap! You don’t care about how much your portfolio is worth today. What you want is to get your Brokerage portfolio’s balance to be 25 times your annual living expenses at which point you will be financially independent. Once you have 25 times your annual living expenses saved you can begin to withdraw 4% from your Brokerage portfolio per year and the money should last you for the rest of your life. This is called a 4% rule and can be looked up on the internet. Example: your yearly expenses are $20,000. You need to have $500,000 in the Brokerage account to pay your expenses forever without you having to work. Once you have $500K in the portfolio you can start withdrawing 4% per year (which is 20K) and statistically you should have enough money to do this for the rest of your life. Of course it does not mean you need to retire and do nothing as soon as you’ve saved up 25 times your yearly expenses, but you are no longer dependent on a paycheck to cover your living expenses and can do other things that you might be interested in – raising a family, making jewelry part time, etc. When you turn 60 years old, you would add the money in the Retirement portfolio to calculate if you have enough to cover your living expenses. So if your Brokerage portfolio only has 100K while your Retirement porfolio has 400K you would still be able to cover your 20K per year expenses. Main point to understand here is that how much you spend drives how long you have to work to become financially independent. So a person who can live on 15K per year only needs 375K in their portfolio to quit working if they want, knowing that all their bills will be paid by their investments indefinitely.

  1. If you need money and you have used up all savings AND cut all expenses to a minimum, you can sell some shares in Vanguard Brokerage Portfolio to cover your expenses.  This is better than taking out loans or putting money on credit cards that you can not pay off each month.  However, THIS IS YOUR LAST RESORT!

  1. Educate yourself about personal finance.  Here are a few blogs that I like that would be more interesting and more useful than any book (list of sites).  Don’t hesitate to ask for advice as there are many smart people reading and writing on these blogs.

  1. Ask (our financially savvy friend) to help you figure out the rest of the finances if necessary.

And that’s all there is to it.

I would be very interested to hear what you think about this Plan in the Comments section.  Did I miss anything?  Is it clear?  Do you have a system in place to handle the worst case scenario? How is it similar or different?  If not, do you think it’s a good idea to have the ISHTF Plan?

*You will notice that there is no life insurance in this Plan.  I believe that our assets and liabilities are at a point where if either of us passed the family would be fine financially.  Yes, things like the big house and the second car would need go but after that there would be enough between the paid off home, dividends and one salary to continue our current lifestyle.  Meanwhile, any money saved on life insurance premiums is invested into Vanguard funds.

 

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4 thoughts on “If $h!t Hits the Fan

  1. Does your work not provide a basic life insurance policy? Both of ours do, but they require so little hassle (I think just one form for a beneficiary years ago) that it’s easy to forget they’re there. Nonetheless, should one of us kick it, the other should definitely file a claim. (Free money! Kindof…)

    • I work for myself so I’m my own employer and I don’t provide a life insurance policy :) If I worked for a company I would probably be enrolled in their plan since they are usually cheap/free for a basic coverage you mentioned. My wife has it automatically through her company, so we got that.

  2. I stumbled on this blog post and found it very useful. I manage the finances for me and my wife, who really could use a plan like this in case something happens to me. Thanks a lot for sharing your plan as well as your thoughts on this. Very useful!

    • James, I’m glad you found this blog post! I think it’s very important to have a plan for a worst case scenario in general but especially if your significant other is not as involved in family finances. I see a lot of articles about wills, trusts and other important estate-related details but not enough about writing up a play-by-play for your loved ones. If they are relying on you to guide your family through major financial decisions now, don’t you think they would want to hear your reassuring words in a situation with so much stress, grief and pressure? Everyone’s plan will be different but coming up with one, discussing it and continuously updating it will make your family a whole lot more confident that they are equipped to handle anything that may come their way.

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