Developing Your Financial Plan

Having a solid financial plan for your family is more critical today than ever before.  Pensions are disappearing rapidly (only 25% of civilian workers and 15% of private industry workers had access to a pension in 2022 according to the Bureau of Labor Statistics).  As a result, you Millennials and Gen Zers know very well that the responsibility for funding your retirement falls on you, not your employer or the government.

So, whether you engage an advisor to help you craft a plan or do it yourself, either way you need a plan.  It can seem overwhelming, but building a financial plan does not need to be complicated.

It’s very easy to get bogged down in the details of saving, investing, and other areas of personal finance.  There’s no shortage of rabbit holes out there in cyberspace, especially on social media.  But it’s important to understand and apply the basics of financial planning before you head down any of those rabbit holes.  So, here are some basic steps to get you started:

Live below your means

If you start out spending everything you make, it will be very difficult to break that cycle as you earn more money.  Regardless of your income, it’s essential that you save some of it for a rainy day.  The easiest way to do that is to save first.  In my experience both with clients and in my own personal life, if you attempt to “budget” the savings category AFTER paying bills and spending (even just on essentials), there is seldom anything left to save.  So do it first…before you spend on anything else!

Living below your means also includes minimizing debt.  Some types of debt CAN be useful, but you are better off without most of it.  Borrowing for a home purchase or a car is a reasonable use of debt; however, too much of it can get in the way of saving for retirement and cost you dearly down the road.

Establish an emergency fund

This step is one of the hardest for most people to stick with and yet one of the most critical to your long-term consistency.  An emergency fund should be used for just that…emergencies.  This is not a vacation fund, a home down payment fund, or a slush fund for home renovations or discretionary spending.  This is for financial emergencies that come up requiring you to spend money you didn’t expect to spend.  Some examples might include your car breaking down, a job loss, or your home AC unit going out if you own a home.  With no cash reserve to deal with these events, most people must put savings on hold to pay off the expense…or even worse, dip into retirement accounts.

Make sure you have the appropriate types and amounts of insurance

Number one on this list is health insurance.  You don’t want a medical emergency to ruin your financial plans and put your family in a financial hole.  If you work for a company as a W-2 employee, you most likely have access to health insurance.  Just make sure you sign up for coverage when eligible.  But for 1099 contract workers and other self-employed individuals, if your spouse doesn’t work, works in your business, or doesn’t have health coverage through his or her employer, the burden of obtaining health insurance will fall on you.  It can be expensive, but forgoing basic coverage could be catastrophic and is not worth the risk.

The next type of insurance you don’t want to be without is disability insurance.  Again, many employers, especially technology companies, provide this as a benefit, either fully paid by the employer or heavily subsidized.  But make sure it’s long-term disability.  Short-term is great if provided by your employer, but your emergency fund should be able to cover the short-term.  The bigger risk is a long-term illness or injury that prevents you from working for an extended period of time.  Business owners take note here.  This type of insurance is often overlooked by small business owners.  How devastating would it be for your family if you, as a small business owner, were injured and couldn’t work for the next 18 months?

Life insurance is also important if you have a family.  When a spouse and/or children (or other dependents) rely on your income for survival and well-being, life insurance is a must.  Term life is almost always the best solution here, and it likely costs less than you think.

Do some basic Estate Planning

Establish wills, powers of attorney, healthcare proxies, and medical directives.  And if you have minor children, you will need to assign guardians and trustees.  Don’t put this off!  It’s not as scary as you think, and it doesn’t have to cost a fortune.  There are some good online options for basic documents.

Set beneficiaries on retirement accounts and life insurance

This is frequently overlooked and yet so simple to accomplish.

Save for retirement

The important thing here is that you are saving.  Each individual or family’s savings plan will look a little different, but the main thing is that you are putting money aside into long-term investments that will grow over time.  The most common tools for this part of your financial plan are your employer retirement plan (usually a 401k), a Roth IRA, a traditional (or pre-tax) IRA, and a taxable brokerage account.  When starting out, a low-cost target-date fund that matches your expected retirement age is a good option.  If you prefer to pick other mutual funds or ETF’s to build your portfolio, do some research on passive vs. active on SPIVA and read about the Bogleheads investment philosophy on the Bogleheads forum.

And you might be asking, “how much should I save?”  That is an excellent question that depends on a number of factors.  But a good starting point for someone in their twenties might be 15% of gross household income if you plan to work to full retirement age, currently 67 according to the Social Security Administration.  If you plan to retire earlier than that, you might want to consider something closer to 25%.  And of course, if you’re getting a later start on saving for retirement, you may need to save substantially more to catch up.  Simply saving the 6% in your employer plan in order to get the full match will most likely not cut it.  Oh, for sure you want to get that full match!  But 6% is not enough!

Define and prioritize your goals

It’s often difficult to begin with the end in mind, but you are much more likely to achieve a clear, well-defined goal than you are a vague one.  And set some intermediate goals as well, not just “retirement.”  Purchasing a home is a big goal that requires planning (and saving).

Be prepared to adjust as life happens

Financial planning should be an agile process that adjusts with life events and changes in priorities.

Closing thoughts

Building a personal financial plan should not be complicated.  Everyone can (and should) create a financial plan, either on your own or with the help of a Certified Financial Planner™ Professional.  If you need help, seek out an advice-only financial planner that charges a flat fee.  You don’t have to turn over your life savings to someone or spend a small fortune to get good financial advice.

And beware of “advice” on social media.  The amount of truly awful financial advice floating around on social media is staggering.  Before implementing any advice you read online, read these three books: “The Wealthy Barber” by David Chilton, “The Millionaire Next Door” by Thomas Stanley and William Danko, and “The Psychology of Money” by Morgan Housel.  There are many other great books on the subject, but start with these.