Everybody wants a solid financial plan, yet more than 40 percent of Americans don’t have one. Unless you develop a formal strategy, such as a written plan, you might well find any financial goal elusive. So, here are nine tips for planning:
■ Define your goals. Decide what you need your finances to do and the strategies you need to make your money work best.
For example, do you have children who will attend college one day? You must save the money to make that happen. At what age do you hope to retire? This answer helps you decide how much time you have left to save and then to establish how much you must save to meet this goal.
■ Set up a budget. Any type of financial planning requires creating surplus money in your finances. This is why a budget is so important. It enables you to see exactly how much money you spend each month compared with what you earn.
You might think that a budget adds stress, but over the long run it does the opposite. Adam Broughton of PlanningBetterLives.com says: “Being in control of your spending gives you the ability to say ‘yes’ to the things that really make life meaningful. You are also able to enjoy your expenditures more when you eliminate the stress of constant overspending.”
■ Cut expenses. With a budget in place, you can prioritize outlays and redirect the flow of your money.
Identify necessary expenses that you must pay: mortgage, debt balances, insurance premiums and taxes, to name a few. The next category can be important expenses that you can control to an extent, such as groceries, utilities and outlays related to work or school. You can almost always cut these to some degree.
The third category: purely discretionary spending, such as entertainment, vacations and recreational shopping. Desirable but unnecessary, can be eliminated.
Once you categorize your expenses, you can make reductions or cuts clearly to free your cash for savings or to debt payoff.
■ Create an emergency fund. This could be a bank savings or brokerage money market account holding your liquid cash. Such a fund exists for an unexpected expense or income disruption. You not only weather a brief storm and potentially avoid borrowing. Generally, your emergency fund needs to cover three to six months’ living expenses.
■ Get out of debt. The cash flow you create in your budget after cutting expenses you can now funnel into paying off debt.
You can use different methods to accomplish this, including Dave Ramsey’s debt snowball: You target your smallest debt first, paying it off before moving on to your next-smallest debt and so on. Among the several advantages:
Each balance paid off — regardless of how small — represents visible progress and a moral victory.
Each balance you whittle down completely eliminates a monthly payment, increasing your cash flow to take on the next obligation.
By the time you get to your largest amount owed, you enjoy a greater ability to pay it off because all your other debts are gone.
■ Save for retirement. Hopefully you already put away something for your golden years, even just a little bit each month. As you get out of debt, your cash stockpile increases, ultimately meaning you can save a lot more for retirement.
As with every other financial goal, the most important step is getting started. Begin with contributions in amounts that don’t significantly hurt your overall finances. Then increase contributions each year.
You can direct future pay increases into your retirement contribution or redirect debt payments once you pay off those debts. If your overall finances are strong, you can also feel confident contributing a lump sum to your retirement plan, such as income tax refunds and bonus checks.
■ Save for other goals. A host of reasons exist to save money other than emergency or retirement funds, such as saving for children’s college education, buying a new car (so you can buy one without going into debt) or for major home repairs.
Working hard to get out of debt does you little good if you only plunge back in when faced with a major expense — the merry-go-round many people get stuck on. Prevention through saving is your best strategy.
■ Carry adequate insurance. Many contingencies you can’t possibly save enough for, and that’s the whole purpose of insurance. Coverage comes in various types, including life, health, auto and homeowners’ insurance, in addition to business insurance if you are self-employed.
And often overlooked benefit of insurance: protection of your assets. For example, homeowners’ insurance enables you to repair your residence after damage from certain catastrophes without having to drain other financial resources. Auto insurance likewise pays claims you otherwise must cover out of pocket. Typically you can use life insurance is typically used to replace the lost wages of a deceased wage earner.
■ Set up a will. A properly drawn and executed will is your final direction regarding your financial affairs. At a minimum, if you don’t set up a will your survivors can end up in probate court, working out some sort of a deal to distribute your assets. At worst, assets you intended for your heirs just disappear.
An estate attorney can help; you can modify your will later as your circumstances change. You may also gain a sense of peace on completing your will, just like you can from a proper financial plan.
Jeff Rose is the founder of Alliance Wealth Management in Carbondale, Ill., and also is the founder of the website Good Financial Cents and Life Insurance by Jeff.