The specific advice that financial planners dispense to their clients can vary substantially from one client to another. But most financial planners could give you a list of financial planning tips that they wish their clients had known earlier. Here is a list of 6 basic principles that you should know for better personal financial planning.
1. The stock market is not static
The Subprime Mortgage Meltdown of 2008 may still make some investors shudder when they remember the losses they may have sustained at that time. But the reality is, that was an excellent entry point for many financial and other stocks in the market, as many of them quickly recovered at least some of their losses by the end of that year. The markets have risen steadily in the seven years since the crash, with the Dow and the Standard & Poor's 500 Index reaching new highs in 2016. The power of growth in the market over time can best be illustrated with the Rule of 72, which is a simple mathematical formula that can tell you how long it will take your money to double in a given period of time. For example, if you are earning a rate of 6% in the market and a rate of 2% in your CD, 72% divided by 6 equals 12. Therefore it will take 12 years for your money to double at 6%. Meanwhile, 72 divided by 2 equals 36, meaning that your money in your CD will only double once every 36 years. This means that the money you have in stocks could double three times as often as the money in your CD in this example. Understanding the different investment options, their risks and returns can help you invest intelligently.
2. The earlier you start saving for retirement, the better off you are
While many people don't start thinking about their retirement savings until their forties, most planners would tell you that you should start saving for retirement in your twenties. This gives your money more time to grow. According to the Rule of 72, your money could double once or twice more if you start saving in your twenties versus your forties. This could make a huge difference in the amount that you could have at retirement. If you're in your twenties and reading this, it is vitally important that you start saving in either an IRA or your employer's retirement plan, if offered. If you work in the private sector, your employer may offer either a 401(k) plan or some other type of profit-sharing plan. If you work in the nonprofit sector, then you may have access to a 403(b) plan. If you work as a public servant, then you will probably have the option of participating in a 457(b) plan. But regardless of the type of plan available to you, it's imperative that you begin making elective salary deferrals into the plan. This is especially true if your employer provides matching contributions. The amount that is matched is essentially free money that is yours after you have stayed with your employer for a certain number of years depending on vesting schedule. Think of it this way: if your employer will match the first 5% of contributions that you make from your salary, then that's a guaranteed return of 100% on that 5%. And all of that money can then still grow according to the performance of the investment options that you choose with the plan. Matching contributions are another factor that can make a huge difference in how much money you have at retirement.
3. There's a good chance that you're going to need some form of long-term care
A 65-year old today has at least a 70% chance of needing some form of long-term care before they die, and the need for women is almost two years longer than men.1 Don't wait until retirement to do something about this expense; the costs of long-term care without some form of insurance coverage can be astronomical. They can run anywhere from $4-8,000 per month2, depending upon the circumstances, such as whether you have a private room at a nursing care facility. And those numbers could double if your spouse also needs care. Many insurance companies are getting out of the long-term care business because the claims rate is so high that it has become impossible for them to profitably insure their customers against this expense. One possible solution that exists now to help resolve this dilemma is to buy a life insurance policy that has accelerated benefit riders that can be used to pay for long-term care. This type of insurance policy is becoming increasingly popular as the cost of standalone long-term care policies continues to rise.
4. Buy life insurance when you're young when it could be cheaper
If you're in your twenties or thirties and have a spouse and children to provide for, then you probably need to carry a substantial amount of life insurance in order to replace the income that would be lost to the household if you were to die prematurely. A large 20-year term policy can be purchased at a reasonable price if you're relatively healthy, and this type of policy can provide your family with the protection that they need while you're young. Also it is a good idea to have some coverage in force at least until you retire.
5. Create a budget and stick to it
Those who have a written budget and are able to function within its limits are likely to have far fewer financial problems than those who just try to “wing it” every month. If you have trouble controlling your spending, then it's time to start writing down your total income and total expenses each month. There are several online budgeting programs that could allow you to enter in all of your fixed and variable expenses and help you track your spending by category. Some can even monitor your credit, send you email and text alerts when you go over budget in a certain category and perform other useful tasks that can help you to stay on course.
6. Keep your student loan debt under control
Those who accumulate huge student loan balances may spend the rest of their lives paying them off, and this can substantially disrupt their retirement savings plans and prevent them from accomplishing other financial goals, such as home ownership or buying a new car. If you are weighed down with student loans, you may want to consider putting in overtime at your job or even working a second job in order to help get them paid off. There are also a growing number of companies that allow borrowers to refinance their loans based on nonstandard criteria, which can help them to better manage their debt.
These are just some key facts to consider when doing your personal financial planning. If you'd like to avoid being one of these clients who walks into a financial planner's office in 20 years having made these mistakes, be proactive and make an appointment with a financial planner today.