by Judy M McCutcheon, MBA
We can’t all be independently wealthy, but we can all be financially secure – all it takes is a financial plan and a strong commitment to that plan. We cannot take the same attitude towards our financial future as we do towards our New Year’s Resolution.
Building a secure financial future starts with creating a sound financial plan. It’s pretty much like building a house: the stronger the foundation, the more solid and sturdy the house will be. It does not matter what stage you are at; it only matters that you start and stay on course.
Financial planning is the long-term process of managing your finances in pursuit of your happiness, your goals and your dreams. It is a compass for your financial future. With the uncertain economic climate, it is important that you set some sort of plan in place, as you sail into your future. A plan helps you to see the entire picture; it helps you to set clearly defined and measurable goals, both long-term and short-term. An effective financial plan considers, budgeting; planning for retirement; planning for education; savings/investments; emergency funding, and insurance.
To set your plans in motion, you need to create goals and remember all goals start with a dream. Set specific, measurable financial goals for what you want to achieve. Don’t say, ‘I want to live comfortably when I retire’ or ‘I want a good education for my kids.’ Define what is ‘comfortable and good.’ Have a specific dollar amount so that you will know when you’ve reached your goals. Your goals are likely to change as you go through life; that’s fine, just adjust your plan to suit.
Let’s look at the basic components of a financial plan:
Budgeting: You use budgets in your day-to-day life whether you have it written down or not – you make money, you spend money. However, when you create a written budget, you have a clear picture of how much money you have, you know your fixed and variable expenses and how much is left over after you’ve paid your expenses. The danger with not creating a budget is that your life becomes a juggling act just to keep on track and remember everything. You begin to experience financial freedom when you take the time out each month to work with a written budget. Remember to let your budget be flexible enough to give you breathing room.
Retirement Planning: Having a plan in place for retirement now prevents a multitude of heartaches and hardships at a time in your life when you can least afford it. Saving for retirement needs to be a priority, rather than an afterthought; it does not matter if you are fresh out of college and have another 45 years till retirement or you plan to retire next year. It is never too late to start planning, but the later you start, the more aggressive you will have to be with your saving and investing.
Education: We all know the old saying ‘If you think education is expensive, try ignorance.’ The world today is more competitive than ever before. A high school certificate is no longer adequate. Truth be told not even a first degree is adequate anymore. If you want your kids to have a competitive edge, you must plan adequately for their education. The cost of education increases roughly 20% each year, and if this major event is not planned then you are left with three choices:
- Your child does not attend university;
- Seek a scholarship and be at the mercy of those handing out the scholarship; or
- Get a student loan.
Number one should never become an option, and personally, I am against student loans since they start the child out in a negative position. My advice: PLAN EARLY.
Savings/Investment: The ability to save and invest is the foundation for building wealth. It is important that you do not spend all that you earn and it is even more critical that you do not spend more than you earn. A rule of thumb is to save at least 10% of what you earn. As a component to saving, you should be investing, as savings alone will not help you build wealth. Many of us do not have a full grasp of the stock market and other investment vehicles; there are experts for that. It is important that we invest if we are to experience financial security. Real estate is a great way to start.
Emergency Funding: In life, we should expect the unexpected, and the best way to prepare for some of these unexpected moments is to have an emergency fund. These unexpected events could be job loss, medical expenses, home or vehicle repair. Taking a loan or using your credit card should not be an option. Most experts agree that you should have three to six months of your living expenses as an emergency fund. If you don’t have an emergency fund in place, start small and build up until you reach your goal.
Insurance: Experts will tell you that any financial plan, without insurance as its core, is well, just that – a plan. Insurance as a solid backing to your pan is critical. After you have worked hard to create a secure a financial future for you and your family, you want to protect your wealth. You can find yourself in financial ruin if you are not adequately insured with life, health and general insurance.
Remember, we are responsible for our own financial well-being. Let us give priority to securing our financial future. Start planning early and take advantage of the wonderful power of compounding. Procrastination is the greatest enemy of financial freedom.
Judy McCutcheon is a partner in the firm Go Blue Inc, a Human Development Company. www.goblueinc.net