It’s not about how much money you earn. It’s what you do with the money that matters.
According to Schwab’s 2019 Modern Wealth Survey, more than 60 percent of Americans who have a written financial plan feel financially stable, while only a third of those without a written financial plan feel that same level of comfort. Those with a plan also maintain healthier money habits when it comes to saving and demonstrate good investing behavior.
The goal of financial planning is to make your money goals a reality. Smart financial planning and long term investing involves in the utmost, spending less than you earn, saving and investing a modest amount each month, and accumulating wealth to end up with the financial assets to retire comfortably for 30 years or more.
Developing a financial plan will require an investor to identify their short-, intermediate- and long-term goals, and to create a long term investment strategy for achieving them. Think of a financial plan as a written planning guide to remind you of what you want, where financially you want to be in the future, and what it will take to get there. Despite the benefits of planning, Schwab’s survey shows that only 28 percent of Americans have a financial plan in writing.
Financial Self assessment
A sound financial plan begins by outlining the investor’s goals as well as any significant constraints. Defining these elements is essential because the plan needs to fit the investor’s current reality. Before creating a financial plan, individuals should first perform a quick self-evaluation:
- Are you currently spending more than you earn?
- How much have you already saved?
- What is your current net worth?
- Have you created an emergency fund with three to six months of expenses?
- Are you saving for kid’s college, retirement, or to purchase a home?
- How much money is available for investing?
- What is your risk tolerance?
- Are you buying a stock for fundamental or technical reasons?
- Which investing style do you prefer (e.g., growth or value, trend or countertrend)?
- Determine your view of market sentiment: Is momentum generally tilted up or down?
Simple Financial Plan
“I believe that the biggest mistake that most people make when it comes to their retirement is they do not plan for it. They take the same route as Alice in the story from “Alice in Wonderland,” in which the cat tells Alice that surely, she will get somewhere as long as she walks long enough. It may not be exactly where you wanted to get to, but you certainly get somewhere.” Mark Singer, The Changing Landscape of Retirement – What You Don’t Know Could Hurt You
Regardless of the reams of evidence of how critical planning remains, Americans are not spending the time or resources to plan for their financial future or plan for retirement. However, it is relatively straightforward to create a plan. A simple financial plan will include many of the following parts:
- A personal net worth statement—a snapshot of what you own and what you owe. This will help you know exactly where you stand, and also give you a benchmark against which you can measure your progress.
- Cash flow is essentially income minus expenses—exactly how much money comes in and goes out every year, and understand if it is sustainable in the long term. The foundation for a budget includes identifying fixed and what’s discretionary expenses and if necessary, devise a debt management plan.
- A budget–helps to manage your money, to consider your immediate needs and wants, and to prepare you to achieve your long-term financial goals
- An Emergency fund–ensure adequate cash on hand to cover three to six months of living expenses to handle any unplanned expenses or loss of income.
- A debt management plan—is a crucial part of becoming financially responsibilities. Debt can be used smartly to achieve one’s financial goals, or debt can be used poorly to buy things a person may not need with money he or she does not have.
- A retirement plan—specifying how much you need to save each year to achieve the lifestyle you and your family hope to maintain. This includes a recommendation on how best to maximize Social Security benefits, to incorporate any pension funds and to utilize personal savings.
- An analysis of how current investment portfolio aligns with short, intermediate and long-term goals.
- A plan for college education funding offspring.
- A review of employee benefits, including equity compensation or deferred income planning.
- A review of insurance coverage—the key is to make sure that you have the right types and amounts and that you aren’t paying for unnecessary coverage.
- Planning for special needs—for a child, parent, or other dependent.
- Recommendations for creating or updating your estate plan, including charitable giving and legacy planning
Financial planning and managing your money:
- What are your long term financial goals including a retirement number and what does financial independence look like for you and your family lifestyle dream.
- Determine and track your financial net worth (assets – liabilities)
- Figure out your personal cash flow (income – expenses) that reflects the money coming in minus money going out…determine the source of money and where it is going…develop a budget.
- Align your financial goals to your spending. Connect your spending habits to your priorities. Objective is to become financial independent in both the short and long term.
- Manage health, home owners, automobile, personal liability, long term care and life insurances to manage and mitigate your personal risks.
- Avoid debt and reduce taxes legally by starting your own business or investing in tax free or deferred assets.
- Create an investment plan and strategy for purchasing assets such as equities, real estate or a business. A plan helps an investor focus on long term goals and helps remove emotions (greed and fear) and bad behaviors from investment decisions. Markets will always go up and down. You only lose money if you sell assets and lock in the loss. Buy real estate in great locations and companies doing sensible things and participate in global growth.
- Have a trust and estate plan in place to protect your assets. Ensure your goals and desires for your assets reflect your values and objectives.
Retirement and Financial Planning and Goals
“Our goals can only be reached through a vehicle of a plan in which we must fervently believe, and upon which we must vigorously act. There is no other route to success.” Pablo Picasso
The first steps of retirement planning are to define your long term retirement and financial goals, to establish your number, and write a retirement plan.
Any sound financial plan requires that you figure out your retirement expenses in advance. And, a retirement can now last 30 years. A retirement plan isn’t something you set up once and then leave unattended. A successful retirement plan takes patience, attention, and discipline.
- Planning for retirement involves identifying assets and sources of income, and matching against retirement expenses.
- Planning for retirement involves setting financial, health and emotional including spiritual retirement goals.
An individual may have a higher probability to achieve their goals if they have a specific savings number and long-term goals in mind, which can help keep an individual on track along the way. It gives someone a target against which they can measure progress.
Key elements of a strong financial plan:
- An emergency fund
- A budget to determine cash flow and calculating net worth
- Paying down and avoiding debt
- Health and disability insurance
- Start saving and investing early, pay yourself first and put it on automatic
- Pay yourself first
- Create long term goals
- Saving and investing for retirement and/or college
- Saving and investing for shorter term goals like vacations or a home purchase
- Trusts, wills and estate planning
It is important to find creative ways to spend less — such as exploring local or nearby attractions that are free or less expensive.
After creating your financial goal or plan, you are bound to have times when you don’t reach your goals or you diverge from your plan. But, just like with a diet, if you make a bad food choice, it doesn’t mean you throw out your new way of healthy eating or exercising. Same thing with financial goals and plan. Americans aren’t saving enough for retirement.
But how much is enough? Strategies to calculate the size of the nest egg you’ll need for your golden years. But then life happens, and in life there are unknown variables and unexpected events that can throw a wrench into even the best-laid plans. Still, it’s better to have a plan, rather than to fly blindly into the sunset.
- One popular rule of thumb is that you’ll need to have saved 10 times your final annual salary by the time you are 67.
- Another way to calculate this ultimate goal is to look at current living expenses—annual or monthly—and assume that, in retirement, you will incur about 80% of those expenses.
- Some retirement planning professionals suggest using “the 4% rule” to determine how much retirees can withdraw from their retirement account each year in order to provide a continuing income stream.
Sock away as much as you can.
Power of Compound Interest
Use the power of compound interest —which is interest earned on top of interest — to potentially enhance returns. Because compound interest builds on itself over time, investors who start early tend to have a significant advantage over those who wait,
Calculate how much money you may need once you get to retirement.
There are several common financial retirement concerns individuals have. Managing risks are important for retirees because retirees don’t have time to wait for a recovery of the economy or the market after a down period.
- Investment Loss – One of the biggest financial fears retirees may have is investment loss. Because the markets move cyclically, there’s a good chance you’ll experience a market downturn during retirement.
- Running Out of Money – Once you’re close to or in retirement, a market decline cannot be weathered and running out of money becomes a serious concern.
- Major Health Event – As we get older, it’s common to see an increased need for health care. It’s natural, as a retiree, to worry about a major health event that can set you back financially. But it’s possible to prepare to some degree for such events.
- Inflationary Effects – Inflation is sometimes considered the “quiet killer” of retirement. Over time, prices rise, making your money less valuable. A dollar today is worth more than a dollar tomorrow. Keeping up with inflation is an important part of retirement planning.
Although it may seem like a long way off, starting earlier can help you accumulate wealth and deal with unexpected bumps along the way. It’s important to consider:
- What do you want out of retirement?
- How much do you currently take in and spend?
- How much will you need to maintain a comfortable lifestyle?
As a rule of thumb, you’ll need between 60-80%* of your current income to maintain your standard of living, but this will vary based upon how soon you enter retirement. To help you estimate these considerations use our tools below.
Financial independence and building wealth comes with the knowledge and financial literacy. It’s okay not to spend more than you earn and sacrifice short term benefit for long term financial independence. Think about the end goal — to secure your well being physically, emotionally and financially!
Manage Your Investments and Cash Flow
It’s easy to put things off until tomorrow… or maybe the next day. But with retirement, planning for cash flow (income) and nest egg are required today. And contributing regularly can help you accumulate assets faster.
Developing a financial plan, monthly budget and learning to stay within their boundaries will help you make these contributions. Additionally, your financial plan and budget will help you track your spending, cash flow, net worth and develop the discipline that can help you when you finally enter retirement.
When creating a budget, carefully weigh competing demands such as:
- Paying off debt
- Managing a mortgage
- Taking a vacation
- Raising a family
- Saving for college or retirement
See how these financial considerations – and waiting to invest for retirement – can cost you in the long run.
Implement Your Plan
After assessing your situation, it’s time to look into available choices and then start investing. When weighing your options, consider:
- How involved you want to be in managing your assets.
- Whether there are any benefits to using your employer’s retirement plan.
Depending on your answers to these questions, some products may be better suited to your needs. If you’re the do-it-yourself-type, an index fund that mimics the S&P 500 may be the best choice. For those who aren’t comfortable with or don’t want to be managing their assets closely, a managed portfolio such as a target date fund might be the right way to get started.
Evaluate and Adjust Your Plan
It’s important to monitor your financial plan and investment strategy regularly. As your situation changes, you may need to adjust your allocations or investment strategy. No matter what plan you’re using, or whether you’re doing it on your own or with the help of a financial advisor, it’s important to evaluate your progress from time to time.
The starting point for financial planning start with goals you can achieve. If you don’t know where you’re going, how can you plan to get there? So before you get into the details of saving, budgeting and investing, take time to think about what’s most important to you and what you want your money to achieve.
- Have an financial plan that is simple, goal oriented, realistic and actionable.
- Understand your plan, follow it, and adjust it when things change in your life.
Put your plan into action.
- Keep your portfolio diversified with an asset allocation that’s right for your risk tolerance—and stick with it.
- Don’t wait. If you invest now, you’ll start earning sooner.
Stay on track.
- Do periodic checkups to keep your portfolio healthy.
- Keep in mind that long-term goals are more important than short-term performance.
References:
- https://www.aboutschwab.com/modernwealth2019
- https://www.brownleeglobal.com/saving-vs-investing/
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