You can’t reach your destination without a good map. A lifelong financial plan is just that – a travel plan that will take you from where you are today to where you want to be financially in 10 years, 20 years, 30 years, or longer.
A frightening fact is that a quarter of U.S. taxpayers don’t have a financial plan, making them more likely to live paycheck to paycheck.
October is Financial Planning Awareness Month, so it’s a great time to think about your financial goals and how to best put your money to work for you. So, how do I create a lifelong financial plan? Let’s answer this question in detail.
What Is a Financial Plan?
A financial plan describes how you will spend, save, and invest your money. It can address short-term goals such as paying for a vacation or saving for your first home.
It looks toward life’s changes and includes steps to prepare for the financial challenges of tomorrow. Insurance against life’s risks, savings, investments, and how you’ll spend your money are all part of a comprehensive lifelong financial plan.
How to Build a Lifelong Financial Plan
Take these steps to create your lifelong financial plan.
Review Your Current Financial Status
First, you need to know where you are now. Look at your credit card balances, how much you have in your savings and checking accounts, how much you owe on any loans such as a car note, and your annual income.
Write these numbers down. Your assets minus your liabilities equal your net worth.
If your net worth seems small at this point, remember that it’s a starting point. A lifelong financial plan will increase your net worth. Your debts may seem enormous but writing them down makes them more manageable.
Write Down Your Goals
The next step is writing down your goals. You can include small, short-term goals like a vacation or bigger goals like planning a wedding, starting a family, buying a home, paying for your child’s education, and retirement.
These goals not only shape your lifelong financial plan but can be motivation when paying off debts and saving.
In our answer to creating a lifelong financial plan, we have to talk about debts and describe techniques to pay them off quickly. Your lifelong financial plan should include action steps toward paying off debts such as car financing, credit cards, or consumer debt such as credit card balances.
The snowball method of debt repayment calls for the payment of the smallest debt first, and then taking what you paid each month on that bill and applying it to your next largest debt. This process is like a snowball rolling down a mountain. Your debt payments get larger and larger until you are debt free.
Another plan, the avalanche method, works like the snowball method, but it calls for paying the debts with the highest interest rates first. You may save more money through the avalanche method, but you may see a paid-off debt faster with the snowball method.
Some take out personal loans at lower interest rates to pay off high-interest debts, combining them into one payment each month. If you take this debt-repayment route, be sure not to take on additional debt while you’re making this monthly payment.
Build an Emergency Fund
Financial Advisors recommend having an emergency fund ranging from $1,000 to the equivalent of three months’ wages. When you have an emergency fund to turn to, you’re less likely to charge expenses to your credit cards. This makes an emergency fund an essential part of debt repayment and a lifelong financial plan.
Boost Your Net Worth
As you create your lifelong financial plan, you need to detail how you will increase your net worth throughout the rest of your life. Paying off debts is an essential part of building your net worth, but so is saving and investing.
Tax-advantaged accounts like 401(k) Plans and Individual Retirement Accounts, or IRAs, can build your net worth and help you prepare for retirement by building funds that won’t be taxed until you make withdrawals. Roth IRAs include funds that have been taxed, so retirement withdrawals from a Roth account are tax-free later.
Manage Risks with Insurance
Insurance protects you, your family, and your property from the risks of life.
When you have health insurance, a medical bill isn’t an emergency. Home insurance or renter’s insurance will protect you in case of fire or other calamities. Car insurance covers the costs you would incur in an auto accident. Life insurance protects your spouse, children, or other beneficiaries in case illness or injury claims your life.
Insurance protects the money you’ll accumulate throughout your life since the costs of an uninsured emergency such as an injury or accident could wipe out your assets.
The Bottom Line
So, how do I create a lifelong financial plan? We hope that this article brought some clarity to this topic. But we know that creating a lifelong financial plan can be a challenge, so consult financial professionals to give you the expert advice you need.