Creating a financial plan is a common New Year’s resolution, but what if you have multiple financial needs, or just don’t know where to start? And what is a financial plan, anyway?
First, take a deep breath. You can do this. A financial plan is nothing more than following a few steps—set your goals, assess your finances and manage your income and other resources.
“The journey of a thousand miles,” according to the Chinese proverb, “begins with a single step.” And the financial planning journey begins with goal-setting. What are you trying to achieve in the short-term? How about the longer-term? And how should you prepare for life’s little twists and turns? The 2016 TD Ameritrade Goal Planning Survey revealed that those with a plan are more confident and have set higher goals for retirement.
Researchers from Boston College say the difference between saving and investing is time. “Generally, we save for short-term goals and invest for long-term goals,” they said.
If you need to spend the money in less than a few years, you require savings, while long-term goals like funding retirement or a child’s college education require investing, the researchers say.
Consider creating goal buckets for different time periods; looking out one to five years, five to 10 years, and 10-15 years, and knowing which money is allocated for which buckets. That could give you a better feeling of controlling your destiny.
For example, retirement can be as much as 30 to 40 years in the future. Saving for a child’s college education may be 10 to 20 years in the future.
A good place to start your retirement savings plan is in a retirement plan such as an employer-sponsored 401(k) plan. In fact, many employers will match your contributions up to a certain limit. Many consider this matched money to be the closest thing to a free lunch as exists in the investment world. If your employer doesn’t sponsor a plan, opening and making regular contributions to an Individual Retirement Account (IRA) can be the next best thing. The beauty of retirement accounts such as IRAs and 401(k) plans is the tax advantages of your participation in them.
But some say that before you begin investing for your retirement, you should create an emergency fund, which can be tapped when the car breaks down or a household appliance needs repaired or replaced. Because an emergency fund needs to be liquid, it may be kept in a cash account or a money market fund. Of course, the downside to quick access is a low interest rate, because these accounts have little investment risk. Make sure not to keep emergency funds in the same bucket as your investments, because you don’t want to have to face the unpleasant choice of either selling stocks or taking on debt if an emergency comes up and you don’t have liquid assets. A recent Federal Reserve survey found that 47% of Americans wouldn’t easily be able to come up with $400 in an emergency. That’s not a good place to be.
Besides the big goals of saving and investing for retirement, college, and emergencies, it’s wise to put money aside, if possible, for other big-ticket goals. For instance, the average cost for a wedding in 2015 was $32,641—not including the honeymoon. Car buyers may wish to put down between 10% and 20% of the cost of a vehicle; the average price of a new vehicle is around $31,000. And to save for a down payment on a home, expect to put down between 3.5% to 20%, with the median existing family home price around $240,000 nationwide. Remember, too, that mortgage rates have been climbing over the last month or so, and may continue to if interest rates keep rising. Keep that in mind when planning for home payments.
This all may sound somewhat daunting, and it is. But creating a financial plan and learning to stick to it could ultimately make it much simpler to figure out which goals are achievable and how to reach them. The first step is to set your goals, so you can move on to the rest of the plan—financial assessment and resource management.
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