The best way to achieve your near-term and long-term financial goals is create a balanced financial plan and then to follow through with your plan, making necessary adjustments as circumstances change. The components of a balanced financial plan include budgeting, saving, retirement planning, investing, insurance, and estate planning.
Budgeting is one of the foundations of any financial plan. It is all about cash flow: how much cash you have coming in and how you allocate that cash. Creating both a near-term budget (for the next year) and a long-term budget (for the next five years) can be a useful exercise. Start with a snapshot of your current situation: determine how much income you have and where it is going, including living expenses (food, utilities, telephone, cable, etc.), debt payments, transportation costs, insurance premiums, and savings. Then project your budget forward. For a longer term budget, be sure to take into account any large purchases you anticipate, such as a new car or appliances. This budget is the framework that will you help you complete your larger financial plan, since it will tell you how much money you have, once your basic needs are met, to allocate to other financial priorities.
One or more line items on your budget should be related to saving. You may need to save for emergencies, for education, for a home or other major purchase and for retirement. The keys to saving are to identify your goals, to develop a plan to achieve them and then to start setting money aside consistently until you get there.
One major aspect of the saving component of your financial plan is retirement planning. Although retirement planning involves more than just saving, for many Americans, saving is the cornerstone of a comfortable retirement, because they may not have a traditional pension to fall back on. The sooner you begin saving for retirement the better, since, the longer your money has to grow, the bigger your retirement account balance will be when you need it. If you have an employer-sponsored retirement plan with an employer match, contributing enough to the plan to at least earn the match can be a great way to jump start your retirement plan.
Once you start building your savings, you will need to invest the money you have set aside so that it can grow for you over time. How you invest it will depend on a number of factors including your risk tolerance and when you will need it. Money that you will or may need soon, such as money in an emergency fund, should be in liquid, safe investments even though their returns may be low. On the other hand, if you have 20 years or more until retirement, you could consider taking a bit more risk with some of your retirement funds in order to achieve better long-term returns.
Insurance is a critical component of any balanced financial plan, since it can protect you from the uncertainties that otherwise could result in financial disaster. Be sure that you have health insurance, at least for major medical expenses; disability insurance, to protect your income if you are unable to work; renters, homeowners’ and auto insurance to protect your property; and life insurance to protect your family. Other insurance coverage to consider includes umbrella insurance, especially as you net worth increases, and long-term care insurance.
If you don’t have a lot of assets, you may not feel that estate planning is a necessity. However, at least one aspect of estate planning, preparing a will, applies to you. If you don’t have a will, your assets may not be distributed as you wish and your family may not be protected. You also may want to prepare a living will to set forth your wishes for health care if you are incapacitated and a durable power of attorney for health care to name someone to make health care decisions for you if you can’t do it yourself.
financialplan.about.com, Building a Balanced Financial Plan: The Three-Legged Stool
Shae Irving, www.nolo.com, The Living Will and Power of Attorney for Healthcare: An Overview
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