Everyone wants a great future! Then why don’t people plan? Many do nothing and leave their future well-being purely to chance. Too confusing, too time consuming, too scary…what if you could map out your financial plan on one page? Sound good? Read on.
According to a 2016 study by Northwestern Mutual, one-third of Americans have no financial plan. Yet, 89% acknowledge that feeling financially secure in the future is more important than having cash in hand today. One way to get confident about the future is to engage in financial planning.
If we knew our future, creating a financial plan would be simple. We would know where we would be in 30 years; our health and date of death; our future investment returns; and how many grandchildren we get the chance to spoil. But we don’t. We do not and cannot know the unknown, which is why we do our best to create a plan today. We base our plan on what we know for sure and what we reasonably expect for the future, then we make adjustments when necessary.
What if I told you creating a financial plan could be simple, stress-free, and not too boring? Carl Richards, author of The One-Page Financial Plan, did just that! For the average person with a straight-forward financial situation without complex income tax or estate planning needs, his book provides the basics on how to get your finances in order on one simple sheet of paper.
Here are a few lessons gleaned from the book:
The First Lesson: Set Goals that Really Matter
The first thing you should do is write down three to five goals that are in-line with your values. When your financial goals and personal values are in agreement, happiness may follow. When you sit down with your spouse and ask, “Why is money important to us?” your answers will remind you why you are working so hard.
Since no one knows all the answers to their future, you must remain flexible with your goals and fine-tune along the way. Be sure to leave some room for unexpected surprises. Revisit these goals annually.
The Second Lesson: Budgeting = Awareness
Be aware how you are spending your money. Every dollar you earn should have a purpose. The purpose for each dollar should fall into one of three categories: taxes, spending, or saving/debt reduction.
The first category, you have little control over. In fact, for most W-2 working Americans, their taxes are out-of-sight and removed automatically through their paycheck.
Part of the second category, spending, also has a feature of little control, which is your fixed costs like rent, utility bills, and insurance. However, the discretionary part of your spending category is one of the most important pieces to your future financial success. By taking control of your spending, you take responsibility for the many unnecessary purchases you have made, and understand that nothing will change unless you change your behavior.
Your monthly spending choices will impact the third category regarding how much debt you can reduce or compound interest you can earn from investing. It sets the stage for how quickly or easily you will be able to meet your valued financial goals. As Richards states, “People who understand interest, earn it. People who don’t, pay it.”
The Third Lesson: Invest Like You are Watching Your Grass Grow
Watching grass grow and investing should have one thing in common: boring. Don’t listen to your neighbors’ stock ideas, don’t panic when the market is down, and avoid “the big mistake”. In fact, Richards recommends hiring a qualified financial advisor to help keep you accountable and on track. This advisor should have his/her interests in-line with yours; help revisit your financial goals annually to be sure they agree with your values; make investment decisions without emotion or bias; balance your investment risk with the time horizon of said goal; and be able to guide you away from a big ticket, bad impulse purchase that may derail your plan. Or, put simply, your financial advisor should stand between you and that “big mistake” you need to avoid.
If you are one of the 33% of Americans who do not have a plan for your future well-being, start now. On one simple page, you can create a financial plan that will help you and your advisor focus on the goals most important to you and bring clarity to where your money is going and how your spending choices impact your financial goals. Get started and get in control. The result will be a feeling of confidence that your future will be what you want it to be.