Planning for an uncertain future is something we all struggle with from time to time. Whether it’s saving for retirement, getting kids through college, or simply figuring out when to buy or sell a house, uncertainty always plays a role in your decision-making. However, one way to tackle uncertainty is by coming up with a financial plan. While no one can predict the future, having a financial plan that’s made up of the following six essential components can help you pursue your goals.
If you need assistance with your finances, work with a professional financial advisor from Good Life Financial Advisors of Mt. Pleasant. We’re ready to help create a personalized plan for your specific needs.
Clear and Specific Goals
People generally want to save more money, but having vague goals is a surefire way to make sure they aren’t reached. Instead of saying “I want to save more money,” choose a more specific goal, like saving an extra $50 per week for a vacation fund, or putting $300 into an investment account each month. The key is asking yourself how much you want to save, and determining what your goals are for the money you save.
By choosing a specific target, you can set personal milestones and keep yourself on track. It also creates easily achievable “little victories” that you can take pride in, which further encourages you to follow the plan.
Set a Budget
Do you know exactly where your money goes each month? One of the basic axioms of personal finance is that we work hard for our money, so our money should work hard for us. But many of us have no clue how much we spend each month on coffee, lunches, entertainment, or even the cable TV bill.
Creating a budget isn’t about pinching pennies, but learning how your money leaves your possession. Developing monthly spending limits on categories like entertainment, food, travel, and more creates good habits and prevents wasteful money squandering. It also enables you to “pay yourself first” by putting funds dedicated to saving and investing into their proper homes.
Many smartphone apps allow you to create a budget by linking your accounts and creating spending limits. Or, you can do it the old fashioned way with your bank statement and a spreadsheet.
Evaluation of Time Horizon
Your personal finance goals will vary depending on your age and status in life. A 22-year old college graduate has a lifetime of human capital and can afford to make some mistakes. A 56-year old worker might make more money, but has much less human capital and might not be able to withstand a major hit to the markets.
Time horizon dictates much of what we should do with saving and investing. If you’re approaching the end of your working career and don’t have much of a nest egg, you’ll likely need to devote a much higher portion of your income to retirement saving. But if you’re young and have decades of work ahead of you, you can start small or focus on other vehicles like 529 college savings plans for your future children.
Thorough Risk Assessment
Everyone has a different tolerance for risk. Some people have no trepidation buying high flying tech stocks in their IRA, while others prefer the relative safety of bonds or mutual funds.
But risk assessment isn’t just about figuring out which securities to invest in. For instance, how much life insurance should you buy? When should you roll your 401(k) into a Roth IRA? Should you buy a house or keep renting until you can put 20% down? Should you build up 3 months of savings before opening a taxable investment account?
No two people will have the same answers to these questions, and that’s why it’s crucial to perform an honest risk assessment when developing a financial plan. Stocks vs bonds isn’t the only decision we ponder when evaluating risk. Make sure your financial plan keeps you within your comfort level with saving, investing, homeownership, insurance, and more.
Ability to Accept Change
Sticking to the plan is always harder than creating the plan. When we set goals, it’s easy to lose sight of them if things don’t go as planned initially. But that’s okay! Life isn’t static and every financial plan should have wiggle room built in just in case our financial picture changes.
Let’s say you receive a new job offer that results in a 50% bump in pay. Should you keep the same financial plan as you had with your old salary? Of course not! Your financial situation has been drastically altered and your financial plan should change as well. A 50% pay raise is a huge windfall, and you likely can take more risks with investing or put more money into savings or retirement funds. That said, it’s okay to change your goals or risk tolerance if your financial situation improves or worsens.
Work With an Experienced Financial Advisor
We hope you consider incorporating these six components of a financial plan. If you need assistance creating a plan that works for your specific situation, contact the team at Good Life of Mount Pleasant today.