With the constant barrage of information being thrust upon us on a daily basis, it is very difficult to know how to navigate today’s economic environment. Will the Fed start easing, will Washington reach an agreement on extending the debt limit, will interest rates keep going up, will Syria have a global economic impact?
As the famous philosopher and Hall of Fame catcher Yogi Berra once said, “If you don’t know where you are going, you might wind up someplace else.” Having a plan is an essential foundation to helping you meet your financial goals. You wouldn’t remodel your house without a blueprint, and you probably wouldn’t go on a hike without a map, but too many people today approach their finances without a plan that details where they want to end up and how to get there. Creating a financial plan can feel overwhelming, but it doesn’t have to be overly complicated. Here are four steps to help get started.
Create a savings and investment plan. The sooner you get started, the better. A general rule is to target saving 10-15 percent of your pre-tax income in your 20s. If you have delayed savings or have had a financial setback, you may need to increase the amount as you move into your 30s and 40s. A basic building block is to establish cash reserves for three-six months of expenses to be prepared for any unexpected cash needs. Another good starting point is to contribute to a retirement plan, such as an IRA or 401(k) plan. If your employer offers a matching contribution, you should strive to contribute at least enough to receive the entire matching contribution. This can be a highly efficient method to accumulate long term savings. If you are eligible, a Roth IRA can help accumulate savings that grow tax-deferred, and qualified distributions are tax free.
Assess your current lifestyle. Evaluate how your current spending and savings compare to your current income. It sounds simple, but you should not be spending more than you earn, and ideally, there’s money left over to go toward savings. Next, consider your short and long term financial and investing goals. Would you like to save for a child’s college education, buy a home, create an emergency fund, save for retirement? Determine what you want your money to do for you and make sure the plan you develop fits those needs.
If you’re not on track, be realistic about your options. If you’re spending more money than you earn or falling behind against your financial goals, you’ll want to take a hard look at your spending habits and determine what your mandatory and discretionary expenses are. A little sacrifice today, can mean a more secure financial situation tomorrow. If you’re approaching retirement, you might consider delaying until you are in a better financial position. The recent economic downturn has placed increased stress on many individuals and families. If there is a silver lining, one of the positive outcomes I have seen is that families have begun re-evaluating what is truly important to them. People seem to find a way to adjust (whether that be up or down) to a comfortable standard of living.
Revisit your plan at least annually. Tax season can be a good time to take a look at your overall financial situation. Since you’ll need to gather much of your financial paperwork to file your tax returns, you should have many of the key documents that give you a complete financial picture readily available, such as tax returns, first quarter retirement and investment account statements. Strive to set a goal of reviewing your overall finances sometime prior to the end of the second quarter of each year. This gives you a chance to review last year’s finances to compare tax liability or tax refunds within the current year. It also provides enough time to review any strategies such as potential tax gain / tax loss harvesting or possible changes to contributions to company retirement plans, traditional IRA or Roth IRAs prior to the end of the calendar year.
Financial planning can be something that many want to put off and address down the road, but the sooner you develop a comprehensive plan, the better off you will likely be in making progress toward a more sound financial future. With a plan in place, you can keep the proper perspective and stay on a course that can help you be better suited to accomplish the goals, hopes and dreams for you and your loved ones.
Luiz Soutomaior, CFP, CFS, Charles Schwab &Co., Inc.(Member SIPC), 777 NW Wall Street Suite #201 Bend, 541-318-1794, Luiz.Soutomaior@schwab.com, (0913-6635).
