How to Make Financial Planning Easy with a Simple Checklist
October 8, 2014 | Your Finances
By Judy Martel
When the daily to-do list might include grocery shopping, picking up the kids from soccer and preparing tomorrow’s presentation, who has time to think about a financial plan?
While the effort to keep your finances on track today might seem overwhelming, the potential payoff later in the form of financial security can be huge. An easy way to build and maintain a financial plan is to make a checklist of four items that should be the foundation.
The Four Essential Pillars of a Financial Plan
Each person’s individual plan will differ, but once you have the checklist, you can fill in the specifics and monitor it regularly. If you have doubts or questions, work with a trusted professional who can help make it easy for you.
1. A budget. What you don’t know can hurt you, and the balance between money coming in and going out will have a domino effect on your entire financial picture.
First, make a simple budget that tells you what you’re spending. Once you get into the habit of tracking expenses daily or weekly, time on this task will be well spent but minimal. The budget will serve as the “true north” of your financial road map, and you’ll come back to it regularly. To manage debt levels and save effectively for your goals, you need to understand your cash flow.
“For those who haven’t done it, I encourage them to begin by saving receipts for 90 days,” said Matt Carothers, wealth management advisor for Northwestern Mutual in Columbus, Ind. “Most people resist at first, but after 90 days I find it almost always opens their eyes.” Saving receipts and recording them regularly will soon become a habit that requires little extra effort.Monitor: Your system could be daily, weekly or even monthly, but be diligent about recording your cash flow often. Doing it daily requires a few minutes at the end of each day. If you choose monthly, you’ll spend a little more time each month on recording.
2. An emergency fund. Everyone should have cash on hand in the event of a job loss or unexpected large expense. The rule of thumb is three to six months of living expenses, but Carothers cautions people not to buy into rules of thumb too quickly. “Think about how challenging it would be to find another job in your field, for instance,” he said. “You may need up to 12 months of living expenses, especially if you have to relocate.”
After you’ve begun keeping a regular budget, you can easily assess how much you spend on a monthly basis. From there, calculate how much of a financial cushion you’ll need in your emergency fund; if necessary, look to the budget to see where you can save the extra money for the fund.
Monitor: Once a year, reassess to see if your fund is adequate for your spending needs, based on changes in your monthly budgeted cash flow.
3. Income protection. An important component of any plan is ensuring you and your loved ones can maintain quality of life in the event of death or disability. To do that, you’ll need some insurance policies to safeguard against potential financial loss.
“The four main ones that you should buy sooner versus later are health, disability, life and long-term care,” said Carothers. “Rates for all insurance depend on your age and health at the time of purchase. The time you may need insurance the least is when you’re young and single, but based on age and health, that’s the best time to buy,” he added. Not everyone has the funds to buy early on, so Carothers advises consulting the budget to make sure your debt is controlled and your emergency fund is healthy before considering each type of insurance. Perhaps life and long-term care can wait a little longer.
“It will be different for everyone,” he said. “There’s no ‘right’ answer.” Depending on the insurance you already own, determine what you need and make an appointment with an insurance expert to help design a plan for the policies you’re missing.
Monitor: Once you acquire the proper policies, a yearly planning checkup can confirm they still meet your needs (unless you go through a significant life change, such as marriage, a new child or divorce, that immediately alters your plan).
4. A retirement savings plan. “An employer-provided retirement plan is one of the best ways to sock away money for retirement, especially if there is a matching contribution from the company,” said Carothers. “Once again, the younger you get into this, the better, because your money will have time to grow.”
If your company does not have a plan such as a 401(k), it pays to save for retirement in an IRA. You won’t receive the matching contribution, but you’ll still enjoy the tax benefits.
If you invest outside your employer’s retirement plan or don’t understand the difference between a stock and a bond and which is best for you, consult a financial professional for guidance.
Monitor: Once you have a retirement plan in place, a yearly check-in is recommended to review your investment performance and reallocate as needed.
With this foundation, your financial plan will have the flexibility to change and grow with your personal situation, and it will also ensure you are basically covered for most life events. Your goals will shift along with major life changes. But once you have the basic four, you can relax a little and simply monitor each element.
That’s when you can determine whether you want to add a fifth item to your checklist. “Sit back and determine your main goals and where you’re going. Maybe you can put more into saving for a car or the retirement account,” said Carothers. The point is that you’ve built the foundation by focusing your effort on the essential pillars. From now on, the care and nurturing of your financial plan will require less of your time.
Originally published on Northwestern MutualVoice on Forbes.com.