Friday, May 29, 2009

Have A Financial Plan - Part 2

Tip #147 - Have A Financial Plan – Part 2. In the first part of this series we talked about needing a financial plan. Most adults should have a plan mapping out their financial goals. The plan might start out vague when you are younger and then get more detailed as you become older and know more about your income, expenses, and goals. So what should be part of a financial plan? First, you should record your income and your estimated income in the coming years. This will give you a basis for what expenses you can take on. (Alternatively, if you start from goals you have, you will have to come up with the income you will need to maintain the expenses associated with those goals.). After you have your income down, write down your goals, starting with short-term goals – any large expenses you expect to buy or take on in the next five years. Examples could be starting grad-school in a year, buying a car in two to three years, or moving to a more upscale rental unit in 5 years. Then write down your expenses in the short-term. There is no need to be specific here, just overall costs of your fixed expenses – taxes, healthcare, student loans, housing and all that goes with it, shelter, transportation to job, clothing, etc. Then add in your discretionary costs such as vacations, gifts, entertainment, etc.

Next write down your mid-range goals. The goals will get more general the further out they are. Examples might include buying a house in 5-8 years, getting married, or starting a family within 10 years. Last, write down your long-term goals. Examples may include planning on having 2-3 children, buying a vacation home, retiring by age 60.

If you are 22 and single and writing a financial plan, it may be hard to really know when you will get married, how many children you will have, or where you will be living 15-20 years down the road. If you are 30 and married and starting a family, it will be somewhat easier to plan where you are going. Again, there is no need to get specific with mid- or long-term goals, but it’s nice to get an idea of what you want in general. Only time will tell what will really happen.

After you have your income and overall expenses written down on paper, it’s time to put some dollar signs next to your goals. If you income is $50,000 and your fixed and discretionary expenses total $40,000, then you have $10,000 to use to start saving for your goals. Figure out what amount you need to put away per year, towards your short-term goal such as paying for graduate school for the next two years and toward your car in three years. Then look at your mid-range and long-term goals. Which ones of those should you start saving for now? Since a house as part of your mid-range goals and retirement in the long-term are two very expensive goals, you should probably start putting money away for those now, too.

If you don’t have enough money for these four goals, look into your discretionary spending and see what you can cut down or cut out. This is where your budgeting comes in. And this perhaps may be where you may try to live more frugally so you can meet your goals with your current income. Alternatively, you might want to try to bring in more income to meet your goals’ expenses. The act of writing down a financial plan will help you understand what types of goals you should be saving for and give you a clear picture of how to allocate funds generally. Creating a budget will give you yearly specifics.

As time goes by, your goals will be revised and updated to reflect realities. Perhaps you will meet your spouse-to-be in the next year and get married sooner than expected. Or maybe you will get a promotion at work and your income will change and you decide to hold off on grad school. Or maybe things will work out generally according to plan. Either way, having a financial plan will help you make wiser choices with saving your money and will help you meet your goals in life.

In Real Life (IRL) – As I mentioned in part 1 of this series, I didn’t always have a financial plan. It wasn’t until I was married that my brother helped me create one. I knew, in general, that I was saving for a house and that I hoped to have children and stay home with them when they were young. I had general ideas in my head to make that a reality. My brother helped me to write my goals out based on our incomes. And being older and with a family, he gave me realistic expectations of expenses I’d have with children. I remember him specifically asking, “Are you going to buy braces for them? Hmm, I hadn’t even considered that. College? Yes. Braces? Well, I guess. And for at least $5000 per child, that is certainly a big enough expense to plan for.

About eight years after we made that first financial plan, I can honestly say many things happened that I didn’t plan for. In our first plan, I said I wanted at least two children two to three years apart and that I would take off work for five years. As it stands now, we have three children, one is adopted, and I haven’t worked full-time in seven years. So we have had expenses that we didn’t plan for, such as the adoption. My kids are spaced farther apart than I had hoped, and I’ve taken off more time from work than I had planned. Fortunately, my husband’s salary has increased faster than we estimated. And at each step of the way we have made adjustments to our financial plan. (But we still haven’t started saving for those braces!) If you are interested in making a financial plan, you can contact a fee-based financial planner in your area or you can draw one up yourself, using it as a guide for your financial life and your budget. If you are living on a budget, look for some great frugal ideas at Life As Mom.

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