Build a Financial Plan

Alan and Pam Armstrong didn’t plan to make the downpayment when they found the home they wanted to buy. They didn’t plan on paying high tuition costs when their daughter was ready for college. And when they reached their 60s – you guessed it – they didn’t plan on meeting the full costs of retirement.

The Armstrongs had ambitious plans for their family’s future. But they never had a financial plan. They lived from paycheck to paycheck year after year and avoided looking ahead to anticipate their financial needs. They’re not alone. Many people, even those who enjoy above-average incomes, fall into the same trap.

WHAT IS A FINANCIAL PLAN?

Financial planning is defining your goals in life and realizing that the only way to provide for them is through disciplined spending, regular saving, and wise investing. It isn’t a blueprint for life that once drawn never changes. It’s flexible and adaptable to your changing needs. And, best of all, you can accomplish it at any income level.

A sound financial plan includes both short- and long-term goals. It starts with the realization that, in the early and even middle years of life, you must develop the habit of saving. Only by living below your means can you build a fortress of savings to pay for the important things that lie ahead. Here are a few key concepts to power your planning:

1. Look at where you are today. In the black or in the red?
2. Get your debts under control. Pay them off and turn red into green.
3. Have something to save for – short- and long-term.
4. Have a spending plan that meets today’s necessities but doesn’t undermine . tomorrow’s goals.
5. Take advantage of tax-advantaged retirement plans and savings options like
   IRAs and 529 college savings plans.
6. Don’t ignore life’s pitfalls. Have insurance that protects you.
7. Be positive, not negative. Take pride in making your plans come true. Let’s elaborate on these concepts and see where they take us.

GETTING STARTED

Unless you’re a newborn, you probably have some debt to deal with, maybe more than you should have. Write down how much you owe, to whom, and what interest rates
you’re paying. Put high interest credit cards at the top of your list and tell yourself that for many people plastic is a weapon of mass destruction. Put them in your sock drawer and make more than the minimum payments until they’re paid off. Then only use them
in dire emergencies.

Now look at your other debts. Installment loans for things like cars and home appliances may drain your income each month, but often they’re unavoidable and have a fixed payoff time. Don’t sweat home mortgage debt; the interest in tax deductible, and the principle can be considered enforced savings.

START WORKING YOUR PLAN

Write down a list of major goals in life, how much they will cost, and when you will need to pay for them. The cost may seem overwhelming at first, but remember you have a friend on your side – time. If you start early enough, you’ll have several years to earn the money you’ll need, so there’s no need to panic. For college tuition, there are tax-advantaged 529 savings plans offered by most states.

Just start doing one thing now and do it well: PAY YOURSELF FIRST. That means making regular contributions to your savings the first item in your budget. If possible, do it with automatic deposits from you paycheck (or transfers from your checking account) so you never get used to having those funds available to spend.

Any kind of regular savings program means taking control of your spending.
Imposible? Of course not. Painful? It may seem so. But no pain, no gain. Sometimes it’s as simple as keeping track of where your income usually goes and realizing how trivial some of those expenses really are. A $5 double latte every day adds up to $1,500
a year. Pick some of your favorite indulgences and do the math.

RETIREMENT

One major casualty of the economic downturn and bear stock market has been the rosy retirement dreams of the 50+ generation. Not only did their assets shrink, but their plans to stop working at an early age were shattered. Nevertheless, most of us one day will retire, and without some early planning, it may not be as idyllic as we thought.

No one can predict the long-term future of Social Security, Medicare, and other government-assisted programs. But it seems safe to assume that most of us will have to provide some of our own income after we stop working. That’s why retirement saving and investing should be part of your financial planning. Make sure you take advantage of sound plans provided by your employers, even if they require you to contribute while you work. Maximize your 401k contributions, and make sure the investments are diversified
and conservative. Consider tax-deferred savings plans such as Individual Retirement Accounts (IRAs) as well. Most of these plans are more flexible today and serve as excellent savings vehicles for other goals such as first home purchases and college expenses.

DO-IT-YOURSELF OR HIRE A PROFESSIONAL

Building a financial plan isn’t rocket science, but you don’t have to go it alone.
A financial professional has the experience and tools to organize your information and outline a plan to fit your goals. Make sure you understand how your financial planner is compensated and be wary of buying financial products you don’t really need. Just be certain that you work with someone who is more interested in your financial well being than her own.

Don’t put your financial plan in a drawer and forget about it. The plan you draw up today is just the beginning and should be reviewed and revised regularly. Get involved with your finances and measure major financial decisions against your current needs and goals.

BE AN OPTIMIST

No matter how early in life and carefully you create your plan, expect setbacks to happen. But don’t let them cause you to abandon your goals. Make adjustments, revise your timetables if necessary, but never doubt you will succeed. Millions of people who are no smarter or more fortunate than you find success in financial planning every day.
You will too.

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Copyright 2004 by Financial Marketing Associates, P.O. Box 284, Deltaville, VA 23043. Personal Money Management and To Help You Get The Most Out Of Your Money are registered trademarks of Financial Marketing Associates. All rights reserved.

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