What Is Financial Planning
A financial plan is a document that details a person’s current financial circumstances, their short- and long-term monetary goals, and their strategies to achieve those goals. It can help you to establish and plan for income and spending, debt reduction, and fundamental needs such as managing life’s risks such as those involving health or disability.
A financial plan can provide financial guidance, so you’re prepared to meet your obligations and objectives. It can also help you track your progress throughout the years toward financial well-being.
Investment planning involves a thorough evaluation of your money situation including income, spending, debt, saving, and expectations for the future. It can be created independently or with the help of a certified financial planner.
Budgeting
Budgeting, in contrast, zeros in on the present, providing a detailed plan of how one’s current resources will be allocated.
It deals with all aspects of a persons, daily finances, ensuring that expenditures don’t surpass income, helping individuals navigate their immediate monetary concerns and challenges.
Types of Budgets
Zero-Based Budget
This type of budgeting starts from scratch every month. It demands a justification for every penny spent, ensuring that every dollar has a designated purpose.
This approach is ideal for those who need a fresh perspective monthly and enjoy a meticulous approach to their finances.
Envelope System
A more tactile budgeting method, it involves allocating specific amounts of cash into different envelopes for various expenses.
Once the cash in an envelope is used up, no more spending occurs in that category until the next refill. This system provides a visual and tangible way to monitor spending and can be especially useful for those trying to rein in discretionary spending.
50/30/20 Rule
A simplified budgeting method where income is divided into three main categories: 50% for necessities, 30% for wants, and 20% for savings or paying off debt.
This strategy is great for individuals who prefer a more straightforward approach without diving deep into detailed categorizations.
Benefits of Regular Budgeting
- Financial Discipline: Regular
- Effective Resource Allocation
- Savings Boost
- Insightful Spending Patterns
Retirement Planning
What is Retirement Planning? Creating a retirement plan begins with determining your long-term financial goals and tolerance for risk and then starting to take action to reach those goals. The process can begin anytime during your working years, but the earlier, the better.
The process of creating a retirement plan includes identifying your income sources, adding up your expenses, putting a savings plan into effect, and managing your assets. By estimating your future cash flows, you can judge whether your retirement income goal is realistic.
Needless to say, a retirement plan is not a static document. You’ll need to update it from time to time as well as review it to monitor your progress.
How Retirement Planning Works
A retirement plan is your preparation for a good life after you’re done working to pay the bills or at least done working a full-time job. But it’s not all about money.
The non-financial aspects include lifestyle choices such as how you want to spend your time in retirement and where you’ll live.
The goals for your retirement plan will change in focus over time:
- Early in a person’s working life, your contribution to retirement savings may be modest. The reward is 40-plus years of investment growth.
- During the middle of your career, when your income may be at its peak, you might set specific income or asset targets and take steps toward achieving them.
- Once you reach retirement age, you go from accumulating assets to what planners call the distribution phase. You’re no longer paying into your retirement account(s). Instead, you start collecting the rewards of decades of savings.
How Much Do You Need to Retire
Your magic number, which is the amount you will need to retire comfortably, is highly personalized. But there are rules of thumb that can give you an idea of how much to save.
Estimating Expenses
Your post-retirement expenses largely determine that “magic number.”
It’s a good idea to create a retirement budget, calculating estimated costs for housing, health insurance, food, clothing, and transportation.
And since you’ll have more free time on your hands, you may also want to factor in the cost of entertainment, hobbies, and travel.
It may be hard to come up with concrete figures, but a reasonable estimate will be helpful.
Steps to Retirement Planning
Regardless of where you are in life, several key steps apply to almost everyone during their retirement planning. The following are some of the most common:
- Come up with a plan. This includes deciding when you want to start saving for retirement, when you want to retire, and how much you will need to save for your ultimate goal
- Decide how much you will set aside each month.
- Choosing the right accounts. Investing in a 401(k) or similar accounts.
- Check on your investments.
Stages of Retirement Planning
Below are some guidelines for successful retirement planning at different stages of your life.
Young Adulthood (Ages 21 to 35)
Those embarking on adult life may not have a lot of money free to invest, but they do have time to let investments mature, which is a critical piece of retirement savings. This is the principle of compounding.
Compound interest allows interest to earn interest, and the more time you have, the more interest you will earn. If you can only put aside $50 a month, it will be worth three times more if you invest it at age 25 than if you wait to start investing until age 45, due to the joys of compounding interest
You might be able to invest more money in the future, but you’ll never be able to make up for that lost time.
Early Midlife (Ages 36 to 50)
Early midlife tends to bring financial strains, including mortgages, student loans, insurance premiums, and credit card debt.
Still, it’s critical to continue saving at this stage of retirement planning. The combination of earning more money and the time you still have to invest and earn interest makes these years some of the best for aggressive savings.
People at this stage of retirement planning should continue to take advantage of any 401(k) matching programs that their employers offer. They should also try to max out contributions to a 401(k) or Roth IRA (you can have both at the same time). For those who are ineligible for a Roth IRA, consider a traditional IRA. As with your 401(k), this is funded with pretax dollars, and the assets within it grow tax-deferred.
Some employer-sponsored plans offer a Roth option to set aside after-tax retirement contributions. You are limited to the same annual limit, but there are no income limitations as with a Roth IRA.
Finally, don’t neglect life insurance and disability insurance. You want to ensure that your family can survive financially without pulling from retirement savings should something happen to you.
Later Midlife (Ages 50 to 65)
As you approach retirement, your investment accounts should become more conservative. Treasury bills (T-bills) are one of the most conservative investments, although their returns are also low compared to other investments.
People in this age group have a few advantages. These often include higher wages as well as more disposable income than younger savers.
It’s never too late to set up and contribute to a 401(k) or an IRA. One benefit of this retirement planning stage is catch-up contributions. From age 50 on, you can contribute an additional $1,000 in 2024 and 2025 to your traditional or Roth IRA and an additional $7,500 a year to your 401(k) in 2024 and 2025