Thinking about personal finance can be a little overwhelming — and that's okay. But even if you have reservations, you don't want to push it to the back burner. Taking care of your money and having a plan for your financial future can actually make things easier, not more difficult, as you hit the ups and downs of life.
Personal financial planning
Don’t get overwhelmed when you think about creating a financial plan. In the simplest terms, a financial plan outlines your current financial situation and establishes goals you hope to achieve for your financial future. These goals may include saving money to buy a house, paying off debt, saving for a child’s college tuition, or investing in a 401(k) for retirement. By writing down your financial goals in a financial plan, you’re more likely to keep them top of mind.
Setting financial goals
If you are unsure how to set financial goals, you might start by simply thinking of where you’d like to be financially in one year, two years or five years? Financial goals will differ for every individual, depending on their current situation and goals.
Here are a few points to consider at any age.
The basics of saving
When it comes to getting your financial plan set, there are a few key basics you want to follow:
- Create a budget — Making a budget can be the foundation to your financial success. Set one up as soon as you can and start tracking your income and expenses.
- Save early — The earlier you can save, the better. Giving your retirement investments and emergency savings accounts a lot of time to grow can help you weather the ups and downs of the market.
- Avoid debt — You want to avoid debt as much as you can. So the sooner you pay down student loans and avoid credit card debt, the better off you'll be. Plus, it can help improve your credit score.
- Watch your credit — Your credit score is a huge part of your financial picture. A good credit score can save you money via lower interest rates on loans and mortgages. Also, check it on a yearly basis and dispute any errors.
- Take care of your health — Focusing on a healthy lifestyle when you're young can have a big payoff as you age, helping you potentially avoid medical expenses and getting you better rates for life insurance.
Life events that can affect your financial strategy
Life is full of wonderful changes and events. But along with life changes come new financial needs. Unfortunately, many people don't fully recognize that even small life events can have a huge impact on your ability to save and plan for the future.
Failure to identify and readjust your financial plan when appropriate can have far-reaching impacts, resulting in challenging and often unfavorable financial outcomes.
The list of life events below could help get you thinking about when you might need to review and readjust your financial plan:
- Buying a new home
- Selling your home
- New marriage
- Divorce
- Birth or adoption of a child
- A major disability or long-term illness
- The death of a spouse
- A job loss, change, promotion or starting a business
- Higher education needs
- Caring for aging parents
- Getting closer to retirement
- A reduction in health insurance benefits
- Receiving an inheritance
- Winning the lottery
Think about the future
While retirement is very important, it's not the only thing you need to consider as you age. No matter your marital status or situation, you'll want to build your finances looking at the full picture so you're in a good spot to manage any surprises.
Here are some things to think about:
- Life insurance — Even if you're young and/or single, life insurance is something to consider. A life insurance policy is there to help protect your loved ones, pay off existing debts, cover burial costs and provide some financial stability after you've passed. Plus, policies generally are less expensive when you're younger. It's easy to get a life insurance quote online.
- Long-term care — There might come a time when you're injured, ill or disabled, and can no longer work or take care of yourself. Long-term care insurance and planning can help you cover some of the costs and protect your assets.
- Estate planning — Get your will set up so you have a say in where you'd like your money, property and heirlooms to go. It can help speed up the probate process and ensure your assets are distributed according to your wishes.
Avoid common pitfalls
Unexpected events and difficult times are simply a part of life. During these times, it can be easy to slip into bad habits or to make financial mistakes that could set you back significantly. Common pitfalls that can impair your financial future include:
- Emergency payday loans — You need money in a hurry, but is an emergency loan like a payday loan the answer? The payday loan industry has come under close scrutiny in the last few years. This has regulators such as the Consumer Financial Protection Bureau ramping up efforts to pull back the reins on payday loan lenders in order to prevent them from lending money to borrowers who simply won't be able to repay these high-cost, high-risk loans. Payday loans are also frequently referred to as “no credit check” loans. These loans are especially appealing to individuals who lack a financial safety net, such as a savings account or credit card. Unfortunately, a payday loan that can't be repaid will only exacerbate the financial situation of people who have already exhausted all other financial options.
- Switching out one debt for another — A home equity loan allows you to take a loan out at a bank or credit union using your home equity as collateral. If you use the money to pay off credit cards, you're essentially just swapping one type of debt for another, though the home equity loan terms and interest rate may be preferable to those of your creditors. If you're considering taking out a home equity loan to address your credit card debt, it's important to assess whether you'll be able to recoup that money if you sell your home in the future. If not, you've essentially just increased the amount you paid for your home by whatever amount you borrow. If you know you'll struggle to pay off your home equity loan just as you struggled to pay down your credit cards, then this type of debt may not be a good source to resolve credit card issues.
- Taking on huge college loans — College is expensive and while taking a loan to help pay for college may be a good and necessary investment in education, large college loans can get out of hand quickly. Another common pitfalls is getting awarded more money than you need, which can make it tempting to use those funds for extracurricular stuff. Be strong and try to resist, borrowing only what you need to pay for your tuition and necessities. Borrowing more than you need could end up costing you more in the long run.
Focus on saving for retirement
Regardless of your age, most Americans have a lot of questions about retirement. You want to have some financial independence and live out your golden years relaxing, traveling or just spending time with your loved ones.
To do that, you'll need to prepare for that future:
To do that, you'll need to prepare for that future:
- Take advantage of employer-sponsored plans — Many employers offer some sort of retirement plan, in the form of a 401(k), 403(b) and others. These plans allow you to take money out of your paycheck and put it into a retirement investment account.
- Check for employer-matching — A lot of employers also offer matching contributions, meaning they will match your contributions up to a certain amount or percentage. This is, in essence, free money, so you'll want to take advantage of it.
- Look at other options — Even if you aren't offered a 401(k) through your job, you can still open an Individual Retirement Account (IRA) and make contributions on your own.
When you approach personal finance in stages, the whole picture can become a lot easier to work through. If you need some extra help, consider teaming up with a financial professional who can provide guidance on the best ways to reach your goals.
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