Your financial plan

Financial Plan

A financial plan goes beyond setting a monthly or annual budget. It’s about knowing how you’re going to save money as well as spend it to reach your goals over an extended period of time. How you manage your income and expenses will vary, but regardless of how the specifics change be sure your financial plan takes these five things into account.

Money Management

Money management is the foundation of your financial planning; your ability to follow through with your financial plan will be highly dependent upon how well you manage your money. Mostly, this means creating a budget and sticking to it. However, money management also includes:

  • Responsible use of credit: Credit cards can be very budget-friendly if used wisely, thanks to the various rewards programs that issuers offer. For example, my wife and I get at least 1% cash back on all our purchases, which we use to pay our balance every month. However, if you carry a balance month to month or if you spend more money with a credit card than you would have spent with cash, a credit card can be a budget-buster.
  • Getting out of (or staying out of) debt: Your income is limited and debt makes it even more so. Imagine being paid a net $750 twice a month. Now imagine having to pay a total of $750 a month in credit card payments, student loans, and auto loans. Getting rid of all that debt would effectively be like doubling your income. What could you do with an extra pay check every month?

Savings Goals

Being financially healthy doesn’t mean socking away money and never doing anything with it. Of course, it doesn’t mean spending your money all willy nilly either. If you want to buy a new TV, go on vacation, throw a party, or make a large charitable donation, plan ahead and save for these goals to avoid breaking your budget or landing in debt. Planning for expenses such as these is important in ensuring you’ll have money for everything else.

Financial Security

Financial security could be a savings goal – correction, should be a savings goal! – but it’s so important that it get its own mention. By “financial security,” we generally mean throughout life, but we want to specifically emphasize retirement planning. Some people might be able to retire on social security and their employer’s retirement program alone. However, most people will need at least a third source of income for retirement.

When you set your budget, be sure to include contributions to a retirement account, even if it’s just $25 a paycheck. Thanks to the power of compound interest, even small contributions will add up by the time you retire.

Risk Planning

Do you have insurance? Your situation will likely dictate the types of insurance you have and how much coverage each policy provides. For example, if you’re single and healthy with an aversion to dangerous activities (like sky diving, alligator wrestling, or extreme ironing), maybe all you need is a low-premium, high-deductible health plan. However, if you’re married with a house full of kids, a low-deductible health plan might make more financial sense, in addition to life and home insurance.

Insurance can be a pain. It’s something many people pay for but never use – something that seems counter-intuitive to financial health. However, the unplanned cost of the destruction of a home or a loss of income due to injury or death can be more devastating than monthly planned payments.

That said, even if you choose not to purchase insurance, risk planning needs to be part of your financial plan: either as part of your budget to cover insurance costs or as a savings goal to pay for emergencies when they arise.

Estate Planning

At some point, everyone passes from this life. Hopefully, you won’t have run out of money before then. More than likely, you’ll have something to pass down to family and friend when you pass, i.e., your estate. While death isn’t a pleasant topic to think about, it’s important to have a plan in place for your estate when that time comes. Otherwise, a probate court will decided who gets what, and it can be a very long and expensive process. A will or revocable living trust can help move the process along – and in the case of a revocable living trust, skip probate entirely. These documents can ensure the items in your estate go where you want them to go.

Even if you don’t have a lot of money, it’s important to consider these things. For many, there might be some roadblocks. Maybe you’re so far into debt that you can’t even think about contributing to a retirement account. That’s fine – just don’t be satisfied with that. Plan to eliminate your debt and save for retirement as you free up your money. By developing a financial plan that accounts for these five items, you’ll have taken an important step towards healthy financial living.

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