By Bill Camarda | American Express Credit Intel Freelance Contributor
5 Min Read | January 31, 2020 in Money
Careful financial planning can help protect you from life’s unpredictability, which always seems to be lurking, ready to pounce. The sooner you start, the better off you’ll be—especially if you haven’t focused much yet on your financial status and goals.
Even if you’ve done financial planning before, things change—often while you’re not looking—and course corrections might be needed. For many people, relatively small changes can make a big difference in the long run. And financial planning is a long game.
To help, we’ve compiled some practical tips from multiple experts that can help you develop and manage a comprehensive financial plan.
Financial planning is all about developing a savings and investment plan to help you achieve your goals in life. Some parts of that plan-building process can be tedious—like detailing out your income, assets, and liabilities. And some might be emotional—like figuring out what your life goals really are.
To get your financial planning process started, it’s good to know your personal “free cash flow”—the disposable income and other assets you have to work with. You can start with your statements and pay stubs, and tally your income, assets, and debts. Here’s what you need to get started:
It’s worth noting that online financial planning tools could simplify this process and streamline future updates.
Next comes identifying your expenses—including your best guesses about surprises. As financial planner Liz Weston writes, “If you have a body, a car or home, sooner or later it is going to cost you.”1 You don’t know what unexpected event will happen, but something probably will.
You can start by assembling credit card and checking account statements, adding up what you’ve spent in each of the past few months. If you use ATMs, drill down to estimate where the withdrawn cash went. Tracking might be easier if you pay more expenses through a credit card instead of bills and coins, since many card issuers automatically categorize expenses for you. Remember expenses you only pay occasionally, like:
Understanding your health insurance deductibles can help you begin to plan for out-of-pocket health expenses. Don’t forget dental or vision costs insurance might not cover.
Homeowners know boilers, refrigerators, and roofs don’t last forever. The Standard Estimated Life Expectancy Chart for Homes published by the International Association of Certified Home Inspectors is a useful planning resource to tell you how much to set aside.2 Or, you could keep it simple: some planners suggest budgeting 1% of your home’s value each year for potential repairs.3 If you have a car, AAA encourages you to budget at least $50 per month for maintenance and unexpected repairs—especially if it’s out of warranty.4
Finally, include other major expenses you want or need: vacations, college, a home purchase or upgrade, a new car. Consider establishing separate accounts to save for these.
Tally all these potential annual costs, and divide by 12. The result becomes your basic monthly expense budget. Experts recommend you don’t just file away your budget—use it to track your actual performance. Then, do an end-of-year post mortem to see where you succeeded and failed. Refine next year’s budget to reflect what you’ve learned.
All this budgeting shows what it’ll take to just stay even with expenses. But your financial planning process depends on doing better than that. How much to save depends on your goals and situation, but planners often recommend saving at least 10% of your income. Many recommend saving 20%.5,6
One common recommendation: ramp up savings until it starts to hurt—see how far you can go before you feel the pain. Automate money transfers from checking to savings or other accounts, so the money isn’t available to spend without an extra step—which gives you time for second thoughts.
It’s easier to save when you grab “free money.” Two quintessential examples are retirement savings in tax deferred accounts and employer-matched 401k contributions. They encourage you to start saving for retirement earlier and benefit from compound interest, dividends, or other investment growth.
You can also explore:
Simply tallying income and expenses won’t grow your assets: experts say for financial planning to get you all the way to your goals, you’ll probably need to aggressively control spending. Here are some ways:
As you cut costs, perhaps you can increase revenue, too.
Financial planning can help you take—and keep—control of your money and your life. There are many practical ways to plan, budget, cut costs, increase income, and save. It may take work, but these practical tips can help you get there.
1 “Defining Unexpected Expenses,” The Balance
3 “How to Budget for Long-Term Home Repairs,” Liberty Mutual
6 “The 50/30/20 Rule of Thumb for Budgeting,” The Balance
7 “Why 2019 is a bad year to start a new car lease,” Yahoo! Finance
9 “10 Best Ways to Save Money,” Regions