Planning – Goals, Budget & More
This is the final post in my new Pillars of Personal Finance series.
- Saving – The Bank of You
- Investing – Growing Wealth
- Debt – World’s Biggest Product
- Income – Your Personal Economy
- Planning – Goals, Budget & More
Financial Goals
The first step in financial planning is defining your goals. Without any goals, you don’t have anything to plan for. My first goals were to save for a house, retirement, wealth and an emergency fund. Soon I got married and had kids, so I added college funds to the list. After 10 years of saving, I bought a house and changed that goal to paying off the house early. I realized my wealth fund had plenty of money to cover emergencies, so I merged those two investments. The moral of the story is, goals change and they don’t need to be perfect in the first place. Create financial goals now and adjust them as you go.
Goals require a commitment to make them happen. Financial goals need to be funded or they will die like a house plant you forgot to water. You can’t have a realistic goal of buying a house, without saving a down payment. If you plan to travel when you retire, that also must be funded. The sooner you create and fund your goals, the sooner you will achieve them.
Action Item: Write down your financial goals and next to each goal write the monthly amount you need to fund it.
Budgeting
Anyone who has followed my blog knows, I despise budgeting. But, it has to be done. Watching your paycheck disappear with no idea where it all went is not an option, if you want to get ahead. I’m not that guy who collects up receipts and puts money in envelopes. Instead, I found a simple way to budget and keep on track. I call it my Quick Budget and it’s a very simple Excel spreadsheet, you are welcome to download. All you need to do is enter your bank balance on payday, enter your investments and bills and it does the rest. It lets you adjust your payments to allow the amount of cash you need to survive until next payday. It also has a Cash Reserve, in case anything unexpected comes up and a Cash Needed column for any expenses you know are coming.
Quick Budget
- Enter Bank Balance on payday.
- Enter Cash Reserve.
- Enter Cash Needed for special items or events.
- Enter Investments.
- Enter Expenses & Utilities.
- Cash Available is what you have left to spend until next payday.
Action Item: Create a simple monthly budget that includes some wiggle-room.
Debt Management
I covered debt management in solid detail in my earlier post, so I won’t bore you with it all over again. If you have debt and haven’t yet created a plan to get out of it, now is the time. I have included a basic Debt Snowball in Excel you can download to get started. Having a plan ends the helpless feeling and empowers you to crush your debt.
Action Item: Create a Debt Snowball and confirm you have enough income to fund it.
Retirement Planning
Retirement planning is a long-term process that can take decades. Get Started now. Everyone has different needs and expectations at retirement. I want to stay in my beach house, instead of moving to a trailer park, so I paid it off early. I want to retire early, so I’m maxing out my 401K and Roth IRA. Some of you will receive a pension or have a lower cost of living, so you may not have to work so hard at it. Some of you may want to keep active by working longer, so there’s less of a looming deadline. In any case, the more prepared you are, the more options you’ll have in retirement.
A good place to start planning is with your 401K plan, if you have one. They almost all have calculators to predict your income in retirement. If you are behind, the calculator will give you some tips to catch up. If you don’t have a 401K plan, there are lots of calculators online. You can also engage a financial planner, if you need some help. The sooner you start saving, the better off you will be. The sooner you formulate a plan, the easier it will be to change directions or catch up if you fall behind. The goal is to have at least 75% of your working income in retirement. Some of your costs, like raising kids and commuting, will go down. Others, like medical costs and long-term care, will go up.
Key to Success
- Use tax-deferred accounts
- Get a decent rate of return
- Account for taxes and inflation
- Prepare for medical and long-term care costs
Action Item: Evaluate your retirement accounts to see if you are on track to retire with at least 75% of your income.
Estate Planning
The numerous estate laws and details are well beyond the scope of this post and I’m definitely not qualified or licensed to give specific information on estate planning. Here are some basic pointers. For most people, a simple will can serve your needs in making sure your assets are distributed properly. If you have substantial assets or complex finances, you may need a trust. Find an experienced Estate Planner or Trust Attorney and have your estate documents completed properly. You can also use an online legal service, but it’s not something you want to cut corners on. If you have dependents, you may need life insurance. Make sure you check the beneficiaries for all of your accounts and policies. This money may get distributed to the beneficiaries, regardless of the instructions in your will.
Action Items: Check the beneficiaries on all of your accounts and policies and have a will or trust created.
The Bottom Line
Planning is the first step toward realizing the dreams of your future. Without a plan, you are drifting aimlessly toward the debtor’s abyss. With a plan, you are marching steadily toward financial freedom and prosperity.
“It takes as much energy to wish as it does to plan.” – Eleanore Roosevelt
