Red, Yellow, and Green

Most who are reading this know that I am also an airline pilot. In Aviation, these three colors run our universe. Of course, Red is bad. Yellow is not good, and when everything is green it is operating normally.

Here at Incline Financial Planning, we also like to think of certain financial planning issues in this context. This is not an all-inclusive list but will provide a framework as to how we look at certain planning issues.

In aviation, certain warnings are designated with the color red. Think engine fire, smoke, cabin depressurization, not having the landing gear down! They are red for a reason. If these items are left unaddressed, they have fatal outcomes.  Financial Planning also has some red warnings, that if left unattended will have catastrophic outcomes.

 So, what could be so dire in financial planning? A few examples…

1-) Estate Documents. (Last Will, Advanced Health Care Directive, Health Care POA, and Financial POA). For example, If you are a parent and do not have a will that spells out the guardianship of your minor children, you should stop reading this article and immediately get that accomplished. Without your dictation of who should raise your kids, it will be left to the courts to determine what is best for your children. Not ideal!

For the rest of us, estate documents are more than just outlining where your “stuff” goes when you die. They are also needed while you are alive. If for instance you were in an auto accident tomorrow and you were severely injured.  Would you want to be on life support if needed? Advanced Health Care Directives can outline your wishes for your medical team. If the Advanced Health Care Directive does not cover the situation, who would make health care decisions for you? That is where a Health Care Power of Attorney comes in handy. Lastly, who takes care of paying your bills, who manages your investments or accounts if you are not physically or mentally capable?  Having a Financial Power of Attorney designated helps in this situation too. Nonetheless, you should decide on who takes care of these incredibly important topics for you, not the courts.

2-) Life Insurance. If you are the main financial provider for your family or someone who depends on your income, you must have sufficient life insurance. Without it, not only are your loved ones left dealing with your loss, but now they must cope with how to afford their current lifestyle. They may have to sell the house, move schools, stop extracurriculars, etc.…

3-) Disability Insurance. If you were unable to work and did not receive a paycheck, what would that do to your financial situation? If you don’t like the answer, you should have disability insurance. Are you an airline pilot reading this? You have a 1 in 5 chance of having a disability at some point in your career. Do not skimp on this critical insurance.

4-) Credit Card Debt. If you do not pay your balance off monthly, you are highly unlikely to ever “get ahead”. Having credit card debt that is not paid off monthly is a full-alarm emergency.

5-) Property insurance and Umbrella Insurance. Most of us have auto and home, possibly even motorcycle and boater insurance. However, umbrella insurance is the most overlooked. Umbrella insurance sits on top of your other insurances (Auto, Home, RV, Boat, Motorcycle, etc.) and provides an additional layer of liability protection. You should have coverage up to your net worth. If for example your minor child rear ends and hurts a highly paid professional, you are liable for the accident. The settlement of these accidents can be expensive, and the cost can exceed the protection afforded under your auto insurance. In this case, the additional liability is therefore picked up by the umbrella coverage. Umbrella insurance is relatively inexpensive and a must!

Yellow, again with the flying reference. If a modern jet airliner loses an engine, believe it or not, we do not classify this as a “Red” emergency. No, it’s not ideal, and yes, we generally must land immediately, but the airplane will continue to fly just fine. However, the longer we continue to fly with a yellow caution, we invite more time for other problems to develop and we can quickly be found in the “Red”.

An example of this in financial planning is as follows:

1-) Not having an emergency fund of 3 to 6 months’ worth of expenses. Yes, you can get by without one. However, you are on the brink of something unplanned sending you into the Red. You have no margin to absorb something going wrong. Here is a secret. Life is never perfect. Something will go wrong. Plan for it. As pilots, we expect the unexpected and plan for it. Therefore, if it occurs, we are ready to handle it.  Why do we sound calm when an emergency happens? It’s because we train for them and are prepared to handle them. An emergency fund does the same thing for you. Lose your furnace in the middle of winter. No big deal, you have cash to cover those expenses.

2-) Having the proper insurance amount. Have you checked your homeowner's policy lately? Construction costs and inflation have been on the rise. Is your home now worth a lot more than it was before COVID-19? Does your homeowners' insurance reflect this? Your coverage may be short by several hundred thousand dollars.

3-) Not saving enough for retirement or college. You are heading in the right direction by just saving, but is it enough? Are you saving in the correct tax-advantaged account?

4-) Not having a cash flow plan. Do you budget? Know where your money is going? Without this key component, you truly are not intentional and in control of your money. You can exist in this state for a long time, but being intentional with your money can catapult you into our next phase “Green.”

In the Green and we are good to go. Well… Not quite. Yes, in aviation green is good. There are no emergencies to contend with, but now we can place our focus on ensuring the airplane is operating as efficiently as possible.

In financial planning, we can do the same. Our goal is now optimization.

1-) You are intentional with your cash flow and spending plan. This dictates the exact amount of insurance we need, which will save you money. We can nail down how much we should have in our emergency fund, allowing us to possibly invest more and therefore earn higher returns on that cash.

2-) You are saving enough for retirement and college; It’s time to ensure you have the optimal investment allocation and in the correct tax-advantaged accounts. It is prudent that we make the most of every dollar saved.  

3-) At this point, you may have extra money above meeting all your goals and obligations, and questions arise as to what to do with it. Should we pay down the house? Invest for our grandchildren’s future? Donate to charity? If so, how, and what goal do we tackle first? These questions take serious planning, but these questions are great problems to have.

So where are you in your financial life? In the Red, Yellow, or Green? It should be obvious you need to get your financial life out of the red and yellow. However, most people skip these steps and want to move right to the green. Please take care of the red items first, the “kill items”. Do not linger in the yellow and set a strong foundation so you can participate in the green where pilots like to exist, where you can relax a little and enjoy the view from 30,000 ft.