By FPA member Leslie T. Beck, CFP®
Last Updated: March 22, 2010
Financial planning can seem daunting to many people. There are so many moving parts (estate planning, tax planning, retirement planning, education planning, major purchase planning, etc.) — just thinking about where to start can be intimidating.
But a successful plan can be achieved with just five steps. Working up to the most important step, they are:
- Share the Burden: Money is frequently cited as the biggest source of stress in family life. But families can benefit greatly by spending time talking about their attitudes toward and past experiences with money. Partners should develop a budget together and make joint decisions regarding their finances. Experiment with different ways of handling your money (joint accounts, separate accounts, or a combination) until you find a method that works for you. As your children grow older, discuss your financial situation with them and give them opportunities to handle their own finances, for example through earning an allowance, saving for a goal, or selling lemonade. When troubles arise (and they almost always do) you'll be in better shape to address them as a family.
- Protect and Defend: Protect and defend your assets, including your savings, your earnings power, your home and your health. Though each situation will differ, make sure you have adequate life and homeowner's insurance. Consider disability and long-term care insurance if appropriate. Keep current on issues that affect your employment potential by investing in continuing education. Make sure your assets are invested according to your own personal situation and risk tolerance. And maintain a healthy lifestyle through proper diet and stress-reduction techniques, such as walking or yoga.
- Love What You Do: Steve Jobs of Apple Computer says it best in his 2005 Stanford University Commencement Address. Basically, people who do what they love (or love what they do) tend to do it better, for longer, and are happier for it. And the longer you continue earning income, the better chance you have for a successful retirement. Figure out what you'd love to do, and then figure out a way to do it.
- Save Early, Save Often: Time is critical when saving for retirement, or any goal for that matter. The earlier you start saving, the more your money can work for you through the power of compounding. For every 10 years you delay before starting to save for retirement, you will need to save three times as much each month to catch up, according to the U.S. Department of Labor. But don't despair if you haven't started saving yet. Starting now is better than never starting. Put away as much as you can — aim for at least 10 percent of your gross income if you're in your 20s — up it to 20 percent or more if you're in your 40s or 50s.
- Spend Less Than You Earn: This one is the simplest, but most important. The key to any successful financial plan (or savings strategy) is to spend less than you earn, and save the difference. Create a budget and stick to it, avoid debt and "pay yourself first," and you'll be well on your way to a successful financial plan.
FPA member Leslie Beck, CFP®, is a vice president at Compass Wealth Management, LLC.