Congress has designated April as National Financial Literacy Month. The irony is rich, considering the national debt just surpassed $22 trillion.
Still, it’s a perfect excuse for financial advisors to make our case on the importance of saving, investing, and avoiding financial sabotage.
What is a Financial Plan?
A financial plan is more than just a budget. It is a long-term strategy to achieve your life goals with peace of mind. There are plenty of things to worry about in life, and money should not be one of them. A financial plan organizes and balances your priorities, including:
- Retirement planning
- Estate planning
- Insurance planning
- Education planning
- Tax planning
- Investment planning
You should meet with a financial advisor at least once a year to review the plan and modify when necessary due to changes in your personal circumstances or the economy. Below are some of the events that might prompt a review of your financial plan:
- Buying a home
- Death of a spouse
- Economic recession
- Job loss
- Major health event
- Starting a family
- Sudden wealth (due to new job/promotion, inheritance, lottery winnings, etc.)
- Tax law changes
10 Steps to Getting Your Financial House in Order
The hardest part about taking control of your finances is getting started. Below are 10 simple steps to getting your financial house in order.
STEP 1: Calculate your net worth.
To calculate your net worth, you must fill out a balance sheet. This is a spreadsheet that lists all your assets and debt to determine if you’re in the red or the black. If you have a negative net worth, don’t panic! The only way to improve your financial health is to take an honest snapshot of your current situation. This is our starting point. Now it’s time to set some goals.
STEP 2: Set some life goals.
Money doesn’t exist in a vacuum, it’s a tool to achieve life goals. You might want to buy a house and raise five kids someday, or backpack across the world and become a travel writer. Either way, it’s going to take a financial plan.
It’s never too late to set personal goals. I have some new clients who are 60+ years old, and my first question remains, “What do you want to be when you grow up someday?” The answer isn’t always a job. Think outside of the box: is your dream to retire in a beach house? Or to sit on the board of your favorite charity? Maybe you want to give your children a student loan-free education. Your goals will be the foundation of your short and long-term financial strategy.
STEP 3: Check your credit score and report.
Your credit score is what lenders look at before they decide whether to front you some money. Having a bad credit score can hurt your chances at buying a house, opening a new credit card, getting a decent insurance policy, or even landing a job. It’s also a good idea to scan your credit report for suspicious activity that could indicate identity theft.
There are 3 major credit bureaus: TransUnion, Equifax and Experian. Credit scores can range from 300-850 (which is kind of a weird scale, but we all roll with it). The higher the score, the better. You can check all 3 of your credit scores for free every year at annualcreditreport.com.
STEP 4: Be strategic about your debt management plan.
Lenders don’t offer minimum payments as a courtesy. Paying the bare minimum means you are paying a LOT more interest in the long run. Make sure you are structuring your debt plan to pay off principal (aka. the actual amount of debt you owe), not just the interest.
Start by making a list of your debts and their interest rates. General rule of thumb: whichever one has the highest interest rate, pay that off first. Like most things in life, there are always exceptions to the rule- this is where a financial advisor comes in. A CFP® professional can help you determine what debt management strategy works best for your circumstances and personality.
STEP 5: Make a budget realistic to your life goals.
Start with a list of recurring income and expenses (i.e., bills you pay on a yearly, quarterly, or monthly basis). Check your credit card statements for gas and grocery bills to figure out their average monthly costs. If you are feeling ambitious, include holiday shopping and vacations as annual recurring expenses so they don’t sneak up on you.
STEP 6: Switch your paycheck to direct deposit and set bills to auto-pay.
Auto-billing prevents you from accidentally missing payments while earning credit card rewards points in the process. If you dread the idea of having multiple online billing accounts, consider a password manager like RoboForm or LastPass to make sure you never get locked out.
If you plan to open a 529 college savings plan, investment account, or retirement account, schedule recurring deposits into those accounts as well. The more you can put your financial plan on autopilot, the easier it becomes to stay on track (and take advantage of compound interest).
STEP 7: Open a high-yield savings account.
Are you tired of working your butt off to save money, only to have the bank award your sacrifice with a measly 0.1 percent interest? High-yield savings accounts provide FDIC-insured accounts with interest rates as high as 1 percent.
Think dollars of interest each month, rather than pennies. If you are primarily using online and mobile banking anyway, a high-yield savings account is a great opportunity to start collecting serious interest on your savings.
STEP 8: Increase your retirement and college savings contributions.
When it comes to planning for retirement and saving for college, time is your best friend. The earlier you can start saving the better, thanks to compound interest. Compound interest is the magical force within the financial universe that accumulates “interest on your interest.”
In other words, putting away $100 a year for 10 years will have a much larger return than simply having $1000, 10 years from now. Whether it’s a 401(k), IRA, college savings plan, or Roth IRA, become friends with compound interest. You will be shocked at the difference it makes.
If your employer offers a 401(k)-contribution match, you should at LEAST be paying the maximum match into your plan. If you can spare it (and most people can), slightly increase your contribution rate this year. Even if it’s only by a few percentage points.
STEP 9: Update your estate plan, especially your beneficiary information.
Estate planning protects your loved ones in the event something ever happened to you. If you don’t write up a will or establish a trust (or both), the biggest beneficiary of your life’s work might be the government.
Updating the beneficiary information on retirement plans is just as important as creating a will or trust. Most people don’t know this, but the beneficiary arrangements on life insurance and retirement plans overrule the wishes laid out in a written will.
Just to recap: if you don’t have an estate plan, your money could go to the government. If you have an outdated estate plan, your money could go to your ex-husband. (I’ll let you decide which one is worse.)
While you’re accessing any IRA retirement plans, Roth IRAs, single-k plans, or beneficiary IRAs for your balance sheet, protect your legacy and make sure the beneficiary information is accurate.
STEP 10: Revisit your insurance policy.
If you are planning to start a new business, start a family, make a major purchase, or retire comfortably, you need to manage your risks. Some risks you can self-insure, but others require co-managing the risk with an insurance company. Don’t let insurance companies talk you into paying for more insurance coverage than you need.
A financial advisor can help match you with insurance coverage that best meets your individual needs and lifestyle, including disability, life, long-term care, health, medical savings accounts, auto, business, homeowners, excess liability (umbrella) and more.
Meet with a Certified Financial Planner (CFP®) in New Jersey
Society doesn’t expect you to be an expert on fitness, cars, or home repair. Why should you have to know everything about retirement and investing?
A CFP® professional can help you determine your unique financial goals, develop a budget, calculate your net worth and retirement number, identify your risk tolerance, and maybe even help you find money from a 401(k) you forgot about years ago.
Bodnar Financial has been helping individuals and families achieve their life goals with a sense of security since 1988. Life is too short to worry about money. Let’s make a plan today.