If you fail to plan, you plan to fail. That was the subject of a presentation I made recently at Sun Life Financial in Wellesley. While this may sound like an old cliché it illustrates a very important aspect of personal finance: a financial plan is critical.
Regardless of age or income it is essential that you have a personal financial plan for your finances. However, creating a strategy for financial success is actually the easy part; you just need to know where to start. The 8 strategies below can serve as a guide for straightening out your finances and building a better financial future.
There are many reasons to create a budget. First, it builds a foundation for all the other suggestions in this article. Second, it allows you to pinpoint problem areas and correct them. Third, you will learn to differentiate between your needs and your wants. Lastly, having a financial plan to cover expenses planned and laid out will give you peace of mind. Once done, be sure to stick with it!
As part of your budget, you will also need to plan for an emergency fund. Unfortunately we cannot plan the unexpected. We just know that it will happen sooner or later. To cover yourself in case of an emergency (i.e. unemployment, injury, car repair, etc.) you need an emergency fund to cover three to six months of living expenses.
An emergency fund does not happen overnight. It needs to be part of your budget and financial plan. It also needs to be a in separate account, maybe a savings account. Or some in a savings and some more in a CD. The bottom line is that it needs to be out of sight and out of mind, so that it will be there when needed.
Now that you know what you need and what you want, be resourceful, and be strategic when you spend on what you want. For instance re-evaluate your daily Dunkin Donuts or Starbucks habit, if you have one. Can it be weekly instead of daily? If you eat out for lunch everyday, could you pack lunch some days?
It is important to remember that not all debt is created equal. There is a significant distinction between good debt and bad debt. Good debt, such as a mortgage, typically comes with a low interest rate, tax benefits, and supports an investment that grows in value.
Bad debt, such as credit card debt, will burden you with high interest rates, no tax benefits, and no hope for appreciation. Bad debt will actually reduce your standard of living. When looking at your financial plan you want to make sure that you are keeping bad debts to a minimum. Actually, don’t keep to a minimum: make it go away.
Paying back your debts, especially the bad ones, is one of the most important steps to the success of a financial plan, because debt will only increase if you do not actively work to pay it off. You should include in your budget a significant amount of funds for debt repayment.
Fact is paying off debt is a drag, and sometimes it is difficult to see the end of the tunnel. One way to accelerate the process of paying debt down is to pay strategically. When you pay over your minimum payments, don’t spread it around all your debts. Concentrate your over-payment on a single debt, the one that’s closest to being paid off. It will make that payment go away faster. And when it’s gone, you can direct the liberated cash flow to the next one, and so on.
A high credit score will make it easier to get loans and credit cards with much more attractive interest rates, which will mean less money spent on interest payments and more money in your pocket. Take advantage of the free credit report that the credit companies must provide you free of charge annually. Make sure that there is no mistake on it.
Set aside a portion of your paycheck each month to “pay yourself first” and invest in a savings or retirement account. Take advantage of the tax deferral option that come with many retirement plans such as 401(k) or IRAs. If you have just come out of doing your budget, and you don’t know how to do it all, tax deferred retirement accounts actually help you reduce taxes now (it will come due later, but you will have a retirement plan then, right?). Also, think of the matching funds that many employers offer to contribute to your 401(k). This is actually part of your compensation. Don’t leave it. Take it.
In my line of work, people tell me often that they will never retire. The reality is that everyone will retire someday and it is up to you to make sure that you are financially ready.
Lastly, review your insurance coverage. Meet with your certified financial planner and make sure that your policies match the goals in your financial plan. Insurance is a form of emergency fund planning. At times we will have events that a regular emergency fund won’t be able to cover. Then you will be happy to have property or health or disability or long term care or even life insurance.
If you have any questions or require additional assistance, contact a certified financial planner. They can help you identify your goals and create a financial plan to successfully meet them.
The easy part is starting the financial plan. The hard part is actually implementing. Don’t do it alone, and let me know if I can help.