Key Life Area: Financial
Are you behind on, or making minimum payments, on your credit cards?
Does it always seem like you have too much month left at the end of your money?
Are you confident in being able to retire comfortably?
Read on, for how to improve your finances, and feel better about your financial life area . . .
The financial area of your life can have a great impact on your level of happiness. It is important to be able to feel like you have enough, and not to have to worry about your means for tomorrow. Being able to do this requires patience and planning.
I know, mentioning financial planning can invoke thoughts of sitting down with a mound of receipts and documents with a professional money expert in order to make major preparations for your and your family’s future.
Depending on the complexity of your situation, this may be necessary to a certain extent, but what I’m talking about here involves the basics of:
• saving
• paying off debt
• investing
It also only requires a pad of paper, a calculator, spending records, and income expectations.
For the sake of your personal fulfillment and that of your family, it is important to plan out how much money you will need to save and grow. This applies especially to major expenditures, such as:
• vacations
• weddings
• college
• a car
• a house
• retirement
Keep in mind that this chapter is only a starting point, and is not intended to give you specific advice, so your plans may need to include sitting down with a certified financial planner (CFP) for a comprehensive strategy.
Pay Yourself First
The first part of financial planning, which you may already be familiar with from reading most any book on accumulating wealth, is to pay yourself first.
This is a very important step to take, as spending on “unknown extras” can catch up with you and keep you from saving anything at all if you wait until later.
The key to paying yourself first is to actually do it right away. This means to take a certain amount of your paycheck (experts usually recommend at least 10%) and put it away for savings.
This process should be done immediately – right after paying your essential bills (such as rent and utilities), and before making any expenditures -and through automatic deduction if possible.
The best way to do this, is to request your bank to automatically transfer a certain amount of money from your checking account to your savings account, on the same day each month that you receive your paycheck by direct deposit.
If you perform this action for each paycheck, you will have a definite amount of money you will be growing to be put toward major purchases or expenditures, or to hopefully have for a rainy month!
Steps to a Financial Plan
Okay, so you’re going to be paying yourself first every month – what do you do then? Now you can sit down and plan what to do with the excess funds you will have soon retained.
Alright, here are the steps to how your financial plan can work:
Step 1 -Keep detailed records of your income and expenses so that you can track where your money is going. If you have a computer, you can use a program like Quicken to organize your accounts and transactions.
A great free website you can use is www.https://mint.com. It handles your budgeting, credit cards, and investments, all in one place.
Step 2 – Set up a budget based on your expected income and expenses where you include your first expense (after essential bills) as a payment to your savings.
See how high you can make this payment (to yourself) and still meet your other budget items – aim for at least 10% of your income.
If you have trouble meeting your budget while paying yourself 10% of your income, try “trimming the fat” of your planned expenses by considering lowering those of categories such as
• entertainment
• fast food
• dining out, or delivery
• extra cable channels
• cell phone plans
• internet speed
Giving up some indulgences may prove to be worthwhile in the long run to allow for expenditures such as buying a home or funding your retirement.
Step 3-Add up your savings self-payments for one year and write down that amount.
Example: $200 monthly self-payments x 12months = $2,400 annual savings
Step 4 – Think about and determine what you want to put your soon to be growing savings toward. Write down each item or event, and put next to it the expected necessary funding amount and how soon you expect to pay for it.
Examples: Vacation: $1,200 in 2 years
House down payment: $10,000 in 4 years
The sooner you start paying yourself first, the better you can benefit from the miracle of compound interest. The longer the duration, the larger the increases in your money become as your interest from later years builds upon your savings and already added interest from earlier years. In fact, it has an almost exponential effect.
Guide to Reaching Your Financial Goals for a Bright Future
Financial planning is essential for a lifestyle of less worry, if you want to be able to meet certain lifetime goals, such as buying a house, purchasing a car, sending your child to college, and saving for retirement.
At first, reaching these goals may seem daunting. However, with advanced planning and consistent funding, they may all be reasonably attainable.
Now, you need to consider what financial instruments and accounts to use, in order to meet your financial goals.
For simple, yet in-depth explanations and information on developing a financial plan, the accounts and instruments you can use, and different approaches you can take, you can go to https://smartasset.com.
Financial Planning Instruments
Figuring out how much money you may need to save up, and how much interest you may need to earn, given certain interest rates, may take some planning.
For help in this area you will need a financial calculator. Websites such as https://pigly.com or https://bankrate.com have calculators to choose from, depending on your situation and objectives. You can also turn to a Certified Financial Planner (CFP) for guidance in this area.
Here is a list of some of the more common money instruments that exist in today’s markets. Following the list is a general guide to suggested timeframes and annual returns of the given money instruments, based on expert opinions, with risk taken into account:
Savings account– a place to deposit money (normally a bank) to earn interest
- typically earns higher interest than a checking account
Money market fund– liquid fund that usually is in safe, short-term investments such as CDs, Treasury bills, and short-term corporate bonds
- may earn higher interest than a savings account
Certificate of deposit (CD)– deposit of funds issued for a specific term, such as 6 months or a year
- typically earns more than savings or money market accounts, but you incur a penalty for withdrawing funds early
Bond– issuance of debt (IOU), which is paid to the holder in the form of principal and interest
- common types include Treasury, municipal, and corporate bonds
Stock– share of ownership in a company
- you can make gains through rise in price and/or dividends paid out on company earnings - you may also lose money through price drop and/or poor company performance
Mutual fund– large pool of money from investors used to buy a group of financial instruments, usually overseen by a manager
- common types include stock and bond funds, and real estate investment trusts (REITs), or any of these combined.
- index funds are unmanaged lower-cost mutual funds that are set up to track certain market index benchmarks
Exchange-traded funds (ETFs) – similar to mutual funds, except can be traded on the market throughout the day
Real estate – ownership of property, including land and/or buildings
- certain tax advantages can be gained through real estate investing
Recommended Timeframes for Investments:
• 0-6 months– savings accounts or money market funds
• 6 months – 3 years– CDs or bonds
• 3 + years– bonds, stocks, mutual funds, real estate, or a combination
Interest rates can change at different times – check with your preferred financial institution or shop around for different rates.
For the most part, safer places for your money are:
savings accounts
money market funds
CDs
conservative bonds
However, to earn higher levels of interest or gains, you may need to take on more risk with holdings such as:
stocks
mutual funds
ETF’s
Stocks and mutual funds have different levels of returns than those previously listed. They can earn higher levels of return, but can be riskier, generally over the short-term (0-3 years).
Over the long-term, the general market of the largest U.S. stocks, known as the S&P 500 Index, has averaged about 8-10% annualized total return.
However, it has gone down in some years, and can be inconsistent over the short–term as well.
For this reason, most experts suggest holding stocks, mutual funds, and ETF’s as long-term investments.
They also recommend diversification of your assets, so that when some of them go down in value, the others rise in value, balancing out your portfolio.
This may mean having a diversified portfolio of stocks (and international stocks), bonds, and/or REIT’s. However, there are many different types of funds and risk/return profiles, and no person has the same goals and situations, so it may be necessary to consult with an advisor. If you want to create one yourself, this article on asset allocation may help.
If you want to focus on owning individual stocks, you may need to have the time to research the companies, to make sure they are financially sound.
If you decide to use this strategy, I recommend learning from books, articles, and YouTube videos about legendary value investor Warren Buffett.
For practical and proven investing advice that follows the same principles, and is easy to understand, you can learn from Rule #1 Investing.
If you know that you do not have the time to spend researching companies, or that you do not have the temperament to handle stock price fluctuations in the market, don’t worry. Buffett has an alternative for you to still come out ahead by investing in stocks long-term. He recommends putting your money in an index fund (such as the S&P 500 stock index) periodically, by “dollar-cost averaging.” To learn more about this method, click on this link:
Warren Buffett: How You Should Invest in 2022
Whatever method you use to invest, however, should be a part of a solid comprehensive financial plan, that takes risks, and timelines, into account.
The Magic of Compound Interest
According to legend, Albert Einstein was asked: "What is the most powerful force in the universe?"
His response: "Compound Interest."
The sooner you start investing, the better you can benefit from the miracle of compound interest.
The longer the duration, the larger the increases in your money become as your interest and gains from later years builds upon your savings and already added interest and gains from earlier years.
In fact, it has an almost exponential effect.
To learn more, read my blog post on the subject about how to take advantage of compound interest for financial flexibility or freedom!
Tax Structures
For particularly common long-term financial targets such as retirement and education, the government is providing assistance in the form of tax-sheltered accounts so that you can save and grow your money tax-deferred, and/or with tax-free withdrawals in some cases.
Over the long-haul, this can have a tremendously positive effect on how much your funds can grow for these purposes.
You can check out the types of retirement plans available by contacting almost any major financial institution. Many experts recommend considering any of these plans as a staple in your overall financial plan.
Here are some of the most common conventional structures:
· Individual Retirement Account (IRA)– tax-sheltered personal retirement account
Traditional: tax-deferred, so you contribute to them with pre-tax money
Roth IRA: contribute post-tax money, and withdraw from them tax-free under certain guidelines
· 401(k) or 403(b) plan– tax-sheltered employee (401(k)) or government (403(b))–sponsored retirement plans which may be contributed to by employees
- many companies offer to match contributions to accounts
· Section 529 Savings plan– tax-sheltered account which can be contributed to for college savings for a child
- designed to be used for college and graduate school expenses
· Simplified Employee Pension (SEP) IRA and Savings Incentive Match Plan for Employees (SIMPLE) IRA plans– retirement savings plans for self-employed individuals
- these plans may have higher tax advantages than traditional or Roth IRAs, or 401(k)s
For information on the new Secure 2.0 Act regarding tax structures, click the following link:
https://finance.yahoo.com/news/secure-2-0-act-retirement-150042550.html
Financial Plan Summary
Taking all of the previous information and applications into account, here is an example of how your overall outline for your financial plan might look:
You will need to estimate the consistent amount of monthly funding you will need to contribute to reach each goal, based on the expected interest, and gains from the previously listed financial instruments and tax structures.
(the numbers are for example only, and are not calculated, or meant for actual application)
Example of Financial Plan Outline:
Monthly self-payment: $500
Annual savings amount: $6,000
Emergency fund:
Goal: $1000 in 3 months
Savings account
Current: $250 cash
Retirement:
Goal: $250,000 in 30 years
Roth IRA
Current: $2,000 ABC mutual fund
Goal: $100,000 in 20 years
401(k) plan
Current: $5,000 XYZ index fund
Child’s College Education:
Goal: $20,000 in 10 years
Section 529 Savings plan
Current: $3,000 ABC ETF
Car Down Payment:
Goal: $2,000 in 2 years
Individual account
Current: $1000 Bank CD
Cell phone:
Goal: $300 in 6 months
Individual account
Current: $75 savings account
Now you have a solid outline for your financial plan. However, you also need to consider how to handle paying off debt, as a part of your overall plan.
Paying Off Debt
“If you find yourself in a hole, stop digging.”
If you find yourself caught up in consumer debt, try to pay it at the same time as putting away savings in order to build fiscal stability. Remember to still pay yourself first.
For information on paying off credit cards, go to: https://www.daveramsey.com/blog/how-to-pay-off-credit-card-debt
or:
https://www.experian.com/blogs/ask-experian/credit-education/how-to-pay-off-credit-card-debt/
Note: You may wish to maintain a limited balance on your credit cards, that you pay off each month, in order to keep good credit. For general information on achieving and maintaining good credit, go to:
https://www.experian.com/blogs/ask-experian/credit-education/improving-credit/building-credit/
If you’re wondering about how much money percentage-wise, to put toward saving, paying off debt, and investing, some people have different strategies.
You may want to save money for an emergency fund, while maintaining a limited credit card balance paid off monthly for good credit, first. When you have established enough savings to cover your expenses for a few months if you lose your job, then you may want to begin investing for long-term goals.
If you can’t pay off the balance each month, your goal may be to pay off your credit cards first, if they have interest rates at 18% or higher, before investing. It is very difficult, as legendary investor Warren Buffett has said, to earn 18% annual returns, or higher, on investments.
Giving
Besides paying yourself first, one thing that most books on wealth-building stress as an important part of money management, is the act of giving back.
Giving a portion (some experts suggest 10%, but only when it makes sense, after you already have savings) of your money to a charitable cause or causes, can have a great benefit to the community, but it also has an invaluable affect on the life of the giver. We have all needed help at one time or another, so it feels good to be able to give back.
Financial Life Area – My Own Story
Years ago, I decided to put a financial plan together. I wanted to put money away for savings and for retirement. I had a set salary, and to maximize it, knew I had to create a budget.
Paying Myself First
I had read about the importance of “paying yourself first,” and so the first item that I put in my budget was a savings payment. This payment came before any other non-essential bills and was nonnegotiable.
My challenge was to adapt my other flexible expenses to then meet my budget. These included food, supplies, and especially entertainment. Once I was able to do this, I felt a sense of security and stability.
Meeting My Budget
Each month, I took my savings payment and put money into my retirement account, into stocks. The rest of my money went to meeting my needs and expenses outlined in my budget. I had developed a system for my finances that helped me to keep them organized and save money.
Having Savings to Depend On
When I lost my job, which happened a couple of times, I had money put away that I was able to depend on while looking for another position. Unfortunately, it was from my retirement account.
That is why it is important to have savings, and build an emergency fund, first, and then contribute to your investments for your long-term goals.
So, by having a financial plan, you will be able to put away funds for savings, retirement, and other goals, that would have otherwise gone toward excess consumption. It will allow you to gain freedom and better manage your financial future.
Conclusion
Financial planning should be comprehensive, but does not need to be overly complex.
With the information given, you can change your mental outlook from concerned to worry-free, knowing that you have your financial goals and methods of reaching them in-hand.
You will then be on your way to building the life you want, knowing it’s built on a solid foundation and plan.
A great article on this topic in general can be found at: https://smartasset.com/financial-advisor/what-is-a-financial-plan.
Note: The information in this writing is not fully complete, and does not include items such as insurance, so it is recommended that, for a complete financial plan, you consult with a Certified Financial Planner, who is experienced, and with whom you are comfortable.
Update: Here are a few articles that simplify financial planning, including one about the importance of having different types of insurance: