Like exercising or eating a good diet, financial planning is one of those things everyone knows you’re supposed to do, but it’s not always clear why, or better yet, how. You know it’s supposed to improve your life, but given how busy we all are, it can be hard to know where to start.
Moreover, when you’re not sure why it’s helpful, it can be hard to get motivated to actually do it. After all, if you’ve made it this far without financial planning, why start now? (Or at least, why start today?)
Allow us to try and answer your questions. Let’s start here: Financial planning can help you make the best use of your money so you and your family have enough to cover current and future financial needs and live comfortably.
You may have already started financial planning without realizing it. If you track your budget or put some money into savings or a 401(k) each month, then you’re doing some financial planning. A well-rounded financial plan should also include long-term goals to improve your financial situation and build a comfortable and secure financial future.
So what exactly is financial planning? What does it entail, and how do you do it? And where should you start? Keep reading for answers to these questions and more.
In this article:
What is financial planning?
Financial planning involves analyzing your finances, setting short- and long-term financial goals, and then formulating a plan to reach those goals. Common short-term financial goals include getting out of debt or building an emergency fund. Long-term goals often include buying a home, putting kids through college, and saving money for retirement.
Your financial plan should also lay out the tools and strategies you’ll use to build and protect the wealth you need to achieve your goals. This may include determining which savings, investment, and retirement accounts best suit your savings goals or the best consolidation option for getting out of debt. Financial planning also involves estate planning, such as getting a will and designating beneficiaries for your accounts, and protecting your finances with life insurance.
Depending on your stage of life and how much wealth you’ve accumulated, you might want to involve the help of a financial planner or advisor at some point. But you don’t need to pay a professional to get started with financial planning. You also don’t need to plan out your entire financial life all at once. Financial planning is an ongoing process that you will use all the way through your retirement years.
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How to get started with financial planning
The first step in creating a financial plan is to thoroughly evaluate your financial situation, including your income, savings, debt, and spending. Hopefully, you already have a budget to help you complete this task. If not, create one and track your monthly income, expenditures, and savings for at least a month.
A budget can help you easily see how much money you have to put toward your goals and where you can make budget changes to free up even more money to put aside. Pay close attention to how much of your monthly budget goes to discretionary spending and paying back debt.
Once you have a clear picture of where you stand financially, you can start setting your money goals and determining the tools and strategies you’ll use to reach those goals. Although everyone’s financial objectives will differ, there are a few specific ones everyone should have and consider working toward first, including paying down debt and building an emergency fund.
Concentrating on these two goals first can help you be more successful in your other financial endeavors by leaving you with more available cash in your budget each month and minimizing the need to take on additional high-interest debt to cover any surprise expenses.
For each financial goal you set, you’ll want to determine how much of your monthly budget you can allot to it. A well-balanced financial plan will have you working on multiple objectives simultaneously, so you want to ensure your budget can support each one. In the case of savings goals, you also want to decide the best place to put your money. The best type of account for an emergency fund won’t be ideal for maximizing retirement savings.
Here’s a closer look at how to begin your financial plan with a few key goals.
Pay down debt
Your first financial planning priority should be formulating a plan to pay off your high-interest debts. Such debts include credit card debt and personal loans. Depending on the amount and types of high-interest debts you have, you might want to consider debt consolidation to help you pay off your debt faster and for less interest.
Once you pay off most of your high-interest debts, adjust your budget accordingly and designate that money for another purpose. You could use it for other debts, such as student and auto loans, or put it into savings. Just have a plan for it.
Build an emergency fund
Another initial goal you should work toward is building an emergency fund. One big unexpected expense or a job loss could quickly land you back into debt if you don’t have money stashed away to get you by. A healthy emergency fund balance will allow you to cover expenses without running up another credit card balance.
Prior to the pandemic, financial experts often recommended saving three to six months of living expenses in your rainy day fund. But if six months of living expenses is unrealistic for you, save what you can, but save regularly.
Also, make sure you’re putting that savings to work earning you more money. A high-yield savings account is a good option for an emergency fund. Many financial institutions now offer accounts with no monthly fees or minimum balance requirements.
Save for retirement
You’ll set and achieve many financial goals throughout your life. But the one you’ll likely work toward the longest is saving for retirement, and you should get started as soon as possible. You have a much better chance at a comfortable retirement if you save gradually over 30 or 40 years rather than cramming for retirement in just 10 or 20 years.
An employer-sponsored retirement plan is an excellent way to start saving for retirement. However, there are many other types of retirement accounts to consider if your employer does not provide a retirement plan.
Once you’ve freed your finances from some of your high-interest debt and have saved enough in your emergency fund to feel comfortable working toward other goals, take a look at your monthly budget to figure out how much money you have to put toward that next goal, whether buying a new car or a house or increasing retirement savings. Maybe you want to save for a dream vacation. Financial plans should include fun financial goals too.
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How to create your financial plan
You don’t need a professional financial planner to create your plan. If you prefer, you can write your financial plan yourself. Several personal finance apps now allow you to track your budget and set financial goals easily. You could even create a simple spreadsheet to get started.
The important thing is to choose a tracking method that works for you. Then figure out your budget so you know how much money you have to put toward your various financial objectives.
At some point, as you build wealth and your financial plan becomes more complex, you may find it beneficial to seek professional help. A financial planner can advise you on everything from tax, insurance, and estate planning products to the investment vehicles best suited for your savings goals.
When to update your financial plan
An essential component of financial planning is monitoring your progress to make sure you’re staying on track and to decide when you might need to update it. Many experts suggest revisiting your financial plan annually. You’ll want to review and update your financial plan after any major life change, like a significant increase or decrease in income or when getting married or divorced.
You’ll also want to periodically evaluate the financial tools and strategies you’re using within your financial plan to ensure they support your overall plan and are still the best tools and strategies for the job. This could entail moving money into a new investment, buying or changing insurance coverage, or updating your will.
Life insurance and a will or a trust
In fact, estate planning is a critical component of any good financial plan. Start with life insurance — an affordable term life insurance policy will make sure your loved ones are covered in case something should happen to you.
Essentially, you pay a monthly premium for the life of a term, typically up to 30 years; if you should die during that term, your beneficiaries will receive a lump sum payout called a death benefit equal to the value of that policy. At Haven Life, a 25-year-old woman in excellent health can get a 30-year, $250,000 Haven Term life insurance policy for $14.57 per month. That’s probably less than you pay for streaming services.
Eligible Haven Term policyholders also enjoy no-cost will and trust services from Trust and Will, a leading online provider of legal wills and trusts, through the Haven Life Plus bonus rider, a suite of low- and no-cost services to make life better while you’re still living. You can create a will over your lunchtime, and the peace of mind will last much, much longer than any leftovers.
A well-rounded financial plan can provide financial security and peace of mind
Everyone should have a financial plan, but financial planning is essential if you have a family. It’s no longer just your financial future you have to plan for, and you want to make sure your family will be financially secure. That’s why your plan should encompass everything from tax planning to estate planning to retirement planning. A lack of planning in any financial area can negatively impact your family’s financial future and comfort.
A key component of a robust financial plan is ensuring your loved ones are protected in case the worst happens to you. Life insurance can provide that protection. Again, an insurance agency like Haven Life can help you decide on the type and amount of insurance coverage that can best provide that safety net.
If financial planning seems overwhelming, it doesn’t have to be. Initially, keep your plan simple until you pay off most of your debt and get your emergency fund saved. Then, once you can begin putting a significant amount of savings toward other goals, consider hiring a professional financial planner to help you create a robust, well-rounded financial plan that can provide your family with financial security and you with peace of mind.
Our editorial policy
Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our editorial policy
Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.
Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.
Haven Term is a Term Life Insurance Policy (DTC and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Haven Term Simplified is a Simplified Issue Term Life Insurance Policy (ICC19PCM-SI 0819 in certain states, including NC) issued by the C.M. Life Insurance Company, Enfield, CT 06082. Policy and rider form numbers and features may vary by state and may not be available in all states. Our Agency license number in California is OK71922 and in Arkansas 100139527.
MassMutual is rated by A.M. Best Company as A++ (Superior; Top category of 15). The rating is as of Aril 1, 2020 and is subject to change. MassMutual has received different ratings from other rating agencies.
Haven Life Plus (Plus) is the marketing name for the Plus rider, which is included as part of the Haven Term policy and offers access to additional services and benefits at no cost or at a discount. The rider is not available in every state and is subject to change at any time. Neither Haven Life nor MassMutual are responsible for the provision of the benefits and services made accessible under the Plus Rider, which are provided by third party vendors (partners). For more information about Haven Life Plus, please visit: https://havenlife.com/plus
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