Financial planning is an essential life skill that is often overlooked, regardless of income level or financial status. It can help individuals and families make informed decisions about money, prioritize spending, and identify and achieve financial goals. As you progress through the new year it’s time to revisit your financial plan and make any necessary adjustments to ensure a financially secure future. Here are some dos and don’ts to help you get started.
- Set achievable financial goals
It is important to have a vision of what you want to achieve personally and align your finances accordingly. The size of the goal is irrelevant. Visibility and relevance are important. Goals could range from paying off debt to saving for a down payment on your first home to finalizing your retirement. Write these goals down, prioritize them, set deadlines, and track your progress as time passes.
- Make saving a priority
Creating a sufficient savings plan and holding yourself accountable will ensure your success. Savings is a habit and will become easier the more you do it. We recommend an annual savings rate of 20% of your gross income from all sources. Where possible, utilize employer-sponsored retirement plans & pensions to save in tax-advantaged accounts and automate the process by having your savings taken from your pay before it hits your bank account. Your biggest enemy is lifestyle creep which can steal from your future self!
- Create a budget
A budget is a powerful tool that helps you keep track of your income and expenses. Start by listing your monthly income and all your fixed expenses, such as rent, utilities, and insurance. Then, estimate your variable expenses, such as food, entertainment, and transportation. Finally, compare your income and expenses to determine if you have a cash flow surplus or deficit. This will help you better understand how much you have available to save or if you are living beyond your means. If you discover the latter you should put some effort into changing your spending to ensure you can make room for savings which are an investment in your future.
- Invest in yourself
Investing in your personal and professional growth can have a significant impact on your future financial well-being. This can include taking courses, attending seminars, or pursuing additional certifications. The knowledge and skills you gain can help you advance in your career, increase your earning potential, and improve your financial future.
- Seek professional advice
If you are unsure about your financial plan or have questions, it’s always a good idea to seek professional advice. A financial advisor can help you make informed decisions, guide your investments, and assist you in reaching your financial goals.
- Confuse wants with needs
The age of the influencer has skewed the lines between reality and fantasy for many people when thinking about money. It is important to be realistic when setting goals and prioritize what you NEED over what you WANT. For example, you may WANT to utilize all of your savings on the deposit on a new house, but you NEED some amount of liquid cash at all times as an emergency fund.
- Ignore debt
Financial planning is like time travel. When you save money, you are shifting resources from the present to future. When you borrow, you are bringing resources from the future to pay for current expenses. Do you want to own your future or owe your future. If you have outstanding debt, creating a plan to pay it off is vital. Compounding interest in your savings account is amazing. Einstein called it the eighth wonder of the world. Compounding interest on your debt has the direct opposite effect. There are many methods to accomplish this, but generally, you should focus on paying down the debt with the highest interest rate first. Make this a priority in your financial plan but do not use all of your emergency fund cash to pay down debt early. This could create more debt if you have an unexpected medical bill or some other expense that you must put on a credit card since you have exhausted all of your cash.
- Be a victim of Lifestyle Creep
Be conscious of impulsive spending and avoid lifestyle creep or lifestyle inflation. This is what happens over time as you progress in your career and earn more money but spend it all instead of increasing your savings proportionally. This is easier than ever nowadays as subscription services, online shopping and contactless payments have made spending money so easy it is almost a thoughtless process. When reviewing your budget each year, be sure to look at how much your expenses go up in relation to earnings and savings.
- Ignore your retirement plan
Many people avoid thinking about retirement until it’s only 5-10 years away. Retirement may seem far off, but it’s essential to start planning and saving for it as early as possible. Putting off retirement planning and not saving enough as a result can put you in a situation later in life where you need to make significant lifestyle sacrifices or accept delaying retirement. The earlier you start, the more time your money has to grow and compound and your retirement goals will be more secure.
- Avoid estate planning
Ignoring the basic estate planning documents, like a will and lasting powers of attorney (for health and wealth), could put your assets at risk and leave your family in a financial bind. It can also affect your ability to retain control of your assets and make critical decisions around your healthcare if you were to become mentally incapacitated. Meet with a qualified estate planner and incorporate the basic estate planning documents into your financial plan as soon as possible to protect you and your family against the unexpected.
There is no one-size-fits-all approach to financial planning and it can vary depending on your circumstances. Nonetheless, it is critical to securing your future and ensuring you stay on track as life changes from year to year. By setting achievable goals, creating a budget, investing in yourself, making saving a priority, and seeking professional advice, you can make informed decisions about your money and achieve financial stability.
If you are unsure how to approach financial planning for your own situation, or have questions on how to accomplish your goals, Tanager Wealth Management can help. Contact us to start financial planning journey and make the most of your money.