101 reasons YOU need a financial plan…
No one likes to think about bad things happening, however you must at least plan for the worst while expecting the best. Somewhere in middle life happens, and proper financial planning will keep you humble in the ups and encouraged in the downs.
According to the Wall Street Journal, “Total U.S. household debt, including mortgages and credit-card balances, fell 1.7% in 2009 to $13.5 trillion—the first annual drop since records began in 1945. The debt amounts to $43,874 per U.S. resident.“
Before you think that ALL debt is bad (which we address later on), it is generally believed that eliminating debt is a good thing. We tend to agree. If eliminating your personal debt is the destination, financial planning is the road map to get there.
The average out-of-pocket cost for doctor/hospital bills when giving birth is over $10,000. This assumes no insurance and a just about problem-free 9 months. If your baby needs to spend some time in the Neonatal Intensive Care Unit (NICU), it is not uncommon for daily charges to run in the $3,000 – $8,000 range and higher…considerably higher.
Insurance helps mitigate some of this cost, but if you are self-employed or just like paying things out of pocket, expect to spend a minimum of $15,000 just to bring your healthy bundle of joy into the world. Think that’s expensive? Ohhh just wait.
According to the U.S. Department of Agriculture, a baby born in 2008 will cost low-income households $210,340, middle-income households: $291,570, and high-income households: $483,750 just to get them to the age of 18 (not counting college). Depressed? Check out college costs.
College Board estimates that for a baby born in 2010, the cost of college in 2028 will exceed $250,000 for an in-state school and over $500,000 for private schools. Trade school anyone?
TheKnot.com says the average wedding cost is $28,385 – or the equivalent of giving birth to 2 healthy babies – or attending 1 semester of private college in 2028!
Interestingly enough…between birth, children, college, a wedding, or death, death is the cheapest! But don’t worry (and don’t get any ideas)…financial planning not only prepares you for each of these major life events, it helps you identify all available options now so the reality of these events doesn’t … well … kill you later!
Generally speaking, people don’t have a saving problem, they have a spending problem. If you find yourself wondering why you run out of money before running out of month, starting tracking every penny you spend over a 30-day period. Not only will you be completely shocked at just how much money falls through the proverbial crack each month, you will have accomplished the first step in setting up your own financial plan.
How do you expect to buy something big if you can’t even meet your current month’s bills? The short answer is you won’t. Remember when you were little and you saved for months and months to get that special toy? Think with that mindset, and you’ll be set.
Have you ever sat there watching a rerun of a show for the 20th time and wondered to yourself, “I know exactly how this is going to end…why am I still watching it and why am I not doing something else?” The simple truth is that if you don’t plan for your financial future then your finances simply won’t have one.
I think C.S. Lewis in The Weight of Glory says it best, “The only people who achieve much are those who want knowledge so badly that they seek it while the conditions are still unfavorable.”
Retire doesn’t have to mean lazy. Retire can simply be getting to the point where you and money have swapped places. Money now works for you, and you get to work for your next passion in life. Retire at 21? Retire at 81? It’s all possible.
Genworth has a great website on care costs by state. Do you know what 1 year, semi-private room at a nursing home in California costs? $73,000.
Continuing with the previous point, as many of our parents and grandparents continue to age, more consistent medical care is often needed. Should you find yourself shouldering some of that financial cost, setting up a financial plan early can help you manage this most important of financial realities down the road.
Even though the numbers point to the fact that most wealthy people earn their money as opposed to inheriting it, chances are you’ll want to pass something of a financial legacy on to your kids. Interestingly enough, money habits are passed on to your kids whether you leave them with money (or debt) or not — AND whether you like it or not. More on that a little later.
Improving your credit score is a standard by-product of financial planning. Just as losing weight is the by-product of evaluating and lowering your caloric intake, (1) making payments on time, (2) keeping total debt under control, and (3) keeping old accounts open (yes, keeping them open) are three key factors that can help increase your credit score.
Cutting expenses is not only one of the pillars to modern financial planning, it’s often the money saved from current expenses that provides the capital to save or invest. Later on we’ll cover just how much the average person overspends on their everyday purchases.
When it comes to money, people often think they have the best of intentions (and think is the key word since that’s about all they do when it comes to financial planning: they think about it)! Financial planning not only allows you to analyze your current savings and spending patterns, it allows you to identify dollars that can and should be used for a rainy day. And just because we used the word retirement, don’t think this means you need to hang up your hat at some day. The key with this point is that saving for tomorrow has to start today.
Guilt and money usually meet at the crossroads of I can’t afford it, and I’m going to buy it anyway. Tracking your expenditures — even over just a one month period — will do wonders for the guilt you currently feel when spending money (the guilt will turn to anger when you see how much money is wasted on any given month).
Studies have shown that the average American thinks they are more generous then they are. How about you? Do you spend more time thinking about being generous than actually being generous? Setting up a financial plan will not automatically make you more generous, but it will definitely free up financial resources that could be applied here. Think about it.
From soccer to baseball to football to cheerleading to gymnastics to piano to guitar to violin to karate to any other of the myriad of activities, finding the resources to actually pay for these niceties isn’t going to be easy unless you plan ahead.
See what happens when you don’t have a plan? Did you notice when he gets up that his first words are, “Yeah, I’m OK,” like we all didn’t just see him completely land on his face!
As funny as this is, it’s a great example of how we treat our financial lives. Our money management might make us look like a fool, but we’re to prideful to admit it. We’re too busy telling people, “Yeah, I’m OK.”
The estimated life expectancy for a man living in 2010 is 75.7 years old, while for women it’s 80.8. Chances are you could live even longer than that! Will your money be there with you? Are you counting on the bankrupt Social Security?
Spending is often the culprit of many financial disasters. The problem is that most people have no checks and balance system that actually shows them what they spend their money on each month. Even with great, free online tracking software, people often perceive their income to be considerably higher than it actually is
Whether you think they are or not, your kids are watching how you manage money. Would your kids be better off by copying your lead or doing the exact opposite?
Financial emergencies not only happen, they happen often. While none of us like to plan for the worst, NOT planning at all is perhaps the greatest emergency of all. Many experts say you should have between 3 and 6 months of living expenses set aside to cover unexpected job loss, accidents, medical bills, and more.
The problem is that most people don’t even have enough to cover the rest of the month much less 3 to 6 months out. Setting up a financial plan will help you identify the areas in your budget where money can be allocated for this fund while helping you plan for other safety nets like adequate insurance. Don’t just think that financial emergencies need to be funded with your own out-of-pocket dollars.
Education = enlightenment. Many of the financial scams of 2011 are praying off the uneducated and inexperienced. Think you can really get 500% investing in penny stocks? Think you can search the internet for how to make money online and start making an income tonight? Reality doesn’t work that way, and financial planning gives you the firm footing you need.
According to a recent poll from About.com, nearly 7 in 10 people say they are “very stressed” about money while only 1 in 10 say they are not. That’s a sobering reality and yet virtually no one talks about it – people keep it all within.
While the root of financial stress is not easily answered in a sentence, a good portion of the stress we go through is centered around the fact that we often manage our money like we are walking around in a pitch black room. Fumbling about, we expect at every step to run smack into a wall. Worse yet, many of us spend time fixating and worrying about things that never actually happen. If you are tired of the ups and downs in your own financial stress, start planning your financial future and don’t just hope.
Does your money usually run out before the end of the month? Do you find yourself asking, “Where did it all go?” Have you ever thought, “Next month it will be better…” Chances are your suffering from budget holeitis. Guess what the solution is?
It dosn’t have to just be financial matters – people everywhere get this wrong. Whether it’s the aspiring entrepreneur, a budding musician, or the hopeful day trader, we want the end result without putting in the time and effort to actually achieve the end result.
Finances are no different. Don’t just read this and think you have to do a complete 180 in your life. Start small. (1) Begin by tracking your expenses over a 30-day period. (2) Next month organize your debt from most costly to least. (3) Find your overpayment margin (discussed later) and use that money to start paying off your most costly debt first.
The financial game is a game of inches. If you can’t start small, you won’t achieve anything big.
Nothing screams, “Don’t Marry Me” more than someone who casually deals with money, debt, and financial obligations. Do you want to get married someday? Get your financial house in order. Anybody can spend. Few can spend wisely.
Finances are not only something that affect every human being, they are directly related to every other aspect of your life. This is not to say that money in and of itself is most important – it most certainly is not – rather that wise money management will have a direct and positive impact on just about every other facet to your life. Want to focus on one area this year that can produce the most significant personal development? Start with your money.
In your quest to build up more financial resources, don’t forget to adequately protect the resources you currently have.
Since spending is often the culprit to not building long-term wealth, eliminating excess from your budget is not just a nicety…it’s a necessity.
Not only is it wise for YOU to get your financial house in order — charities, non-profits, churches, and other organizations depend on the donations provided by those with the means to do so.
Why do most people ignore charity all-together? Most people say they can’t afford to be generous (an understandable response), when they really should consider this instead…
Generosity is not confined by fixed percentages or begrudging gifts. True generosity comes from first recognizing the personal blessings we all possess. If you are reading this article, chances are you too are blessed in ways not just tied to financial gain or abundance. Maybe you have financial means and maybe you don’t. Maybe you have a roof over your head, or food in your refrigerator, or a bed to lay down to at night when a good percentage of the world looks to those things as luxuries they can only dream about.
By organizing your financial world (no matter it’s size or scope), you’ll often see the grass is actually pretty green on your side. At a minimum you’ll have identified places in your budget where you could give, and that, my friends, is a start.
Money doesn’t buy happiness, and you can take that to the bank.
Being wise with your money however will empower you in ways you never could have imagined. Don’t let money dictate your mood, outlook, or personality. Take responsibility, and put money to work for you. It will do what you tell it, you just have to tell it to do something.
We’ve all heard the stats that “money” and “relationships” don’t mix, right? Well they must if you hope to get beyond your present financial circumstances.
Take this often taboo topic and use it as a means to connect with your spouse or significant other. Challenge each other to be honest AND encouraging about making this the year you stop reading about financial planning and actually start doing it!
Do you ever sit at dinner in complete silence? Why not throw finances into the mix. Sure it’s a bit boring at time, but think about it…this kind of talk is actually worth something.
No, we’re not talking about doing something dirty to your checkbook. This is about perspective. Properly analyzing your finances will spur on creativity like you’ve never imagined.
Do you dread April 15th? Do you wait until the absolute last minute to do your taxes? Do you break out in cold sweats every time you get a letter from the IRS?
No more, we say! NO MORE!
While taxes will always hold a special place in our hearts, financial planning forces you to make sure that the money you DO have to pay in taxes is used to your maximum gain. There are tax incentives, credits, and rebates everywhere for those who take the time to make sure that every penny they pay is not a penny they could have kept.
Who doesn’t want to be a financial guru?
We’ve said it before, and we’ll say it again: building wealth is not about how much money you save as much as it is how much money you DON’T spend. If you want to build long-term wealth, you’ll need to have a plan. Regretfully, money won’t just show up in your account when you turn 65.
It is estimated that at least 10% of what people purchase could have (1) been purchased for cheaper or (2) they didn’t need in the first place. I think we all would agree this is on the low end of estimates.
Here’s a real-life example to prove the point.
Say you like to go to the movies… and get popcorn… and get M&Ms… and get something to drink. Before you know it, you’ve spent $30 or $40 when you could have done this instead.
Most movie theaters sell “collector” cups that you can buy for virtually the same price as a regular large drink except with THIS cup you can bring it back time and time again (usually for a calendar year) and get refills for cheap – usually a $1. If the average large drink costs $5 and you see 20 movies a year, you’ve just saved $80.
But what about the popcorn? Many theaters also sell tshirts that allow you to get free food if you just wear the shirt to the movie. Instead of paying $6 for popcorn every time you now get it for free. There’s another $120/year in savings (well, let’s say $100 since the shirt probably cost you $20 or so).
And the M&Ms? I’ve got two words for you: Wal Mart.
The best way to prepare for inflation is to make purchases now that you expect to need in the future. With the massive amount of liquidity being poured into our financial system, there is real concern that high inflation – perhaps even hyperinflation – will be knocking on our doors in the coming years.
Financial planning will force you to analyze your current spending as it relates to future consumption. If you fear that tomorrow’s dollar will be worth less than it is today, you now have options to consider before it is too late to do so.
Will you always work for money, or will money always work for you?
The flip side to minimizing what you spend is determining what to do with your savings. Building passive income should be a top priority for any financial undertaking. Whether it is dividends or residual commissions, make sure that a portion of your financial planning is devoted exclusively to passive income.
Fear has a way of debilitating us to the point of inaction, and nothing could be more harmful to your financial future than doing nothing. Doctors, psychologists, and economists have debated for years as to why people are so fearful when it comes to money, and the answers have ranged from ignorance of the topic to bad childhood experiences.
While addressing your money fears will often include more than just a financial education, one thing we know for certain is that addressing future fears now is always better then reacting when they happen. In one scenario, you are the one in control. In the other, your situation is.
Even though so many college grads are doing this they’ve aptly been named the boomerang generation, one key reason you going to need a financial plan is because…well…you can’t live at home forever.
Frugality, like most financial disciplines, is learned in the trenches. If you want to find the resources in your resources to start saving, investing, and building wealth — you must learn to be frugal.
And frugal doesn’t have to mean doing without. The root of frugal has to do with living without waste (a great piece of advice for those who say they can’t afford to save or invest).
Once you start to live without waste (number 54) and stop overpaying (number 60), you’ll quickly start to find that you actually DO have money to invest.
Invest doesn’t necessarily have to do with the stock market either. Investing could be in starting your own business or furthering your education (so you have the increased earnings potential).
The most simple way to think about this is to ask yourself the following question, “Will I have the potential to be better off by investing my money in ________?”
Notice we haven’t gotten into the mindset for what constitutes a wise investment…at this point we’re just using our financial plan so we’ll have the option to chose.
Here’s 1 tip you can follow that just about every time will make you look like a genius. Take a look at what the majority of people are doing and do the exact opposite. I don’t care if it’s finances, relationships, business, or sports. If you do what everyone else does, you’ll get the results that “everyone” gets (which is usually nothing).
As the venerable Dave Ramsey always says, “You need to live like no one else so one day you can live like no one else.”
Try $5,000 – $7,500 a pop! Since approximately 80% of U.S. teens wear braces — if you have kids — chances are you’ll be footing this bill at some point in the not too distant future.
According to CreditCards.com the average credit card debt per household with credit card debt is $15,788 with an average apr of 14.35%. Here’s how the math works out. That’s $188.80 per month or $2,266 per year in interest alone. This does not account for any principal reduction.
If you took that $2,266 per year and invested that same amount for 30 years and received a reasonable 8% return on your investment do you know how much it would be? $277,235.
With credit card debt you are just servicing your debt at $2,266 per year…you are not devoting one cent towards paying it down. Do you see why this is so deadly to your financial future? Thankfully there are several reasonable and doable solutions. Credit card debt is an epidemic that proper financial planning can cure.
As a general rule of thumb, bad debt consists of financing tied to consumable products. Credit cards are the poster child but bad debt also can include debt incurred to buy clothes, cars, vacations, and other personal items.
Bad debt is the nemesis to financial planning because it is often that very debt (and the mindset of the individual that got them into that debt) which keeps people from making the necessary spending changes.
If you want to make 2011 the year you say goodbye to bad debt, make sure it’s also the year you say hello to financial planning.
Believe it or not there is such a thing as “good” debt. Unless you have $150,000+ sitting around to buy a house, chances are your sitting in an example of good debt right now. The line between good and bad debt falls around these two parameters (1) good debt is used to finance assets that should appreciate over time, and (2) the level of debt you do take out is kept to a conservative debt/income ratio.
Basically this means you can use debt as long as it’s a small part of your overall income (different based on varying factors) and if it’s used for buying appreciable assets.
Have you ever sat around on a Sunday afternoon and thought, “Hey, we should go on a trip today…right now…let’s just go!” If you have, then your next thought is usually something like this, “Work…Bills…Debt…(sad face).”
Financial planning will not just help you better your future, it will provide you with some wiggle room for those times when you want (and now can afford) to do things off the cuff. What you’ll notice though is that with your newfound perspective on money — even if you have the resources to cover something spontaneous — that you’ll say, “Well, I cooooouuuuld go on that trip, or I could put even more money away this month!”
Contrary to popular belief and cutting edge medical procedures, you are not getting any younger. (Sorry, Joan). Every day you pass on a financial plan is costing you more than the day before.
Yes, we’ve spent a lot of time talking about money, but perhaps one of the best reasons for why you need a financial plan is also one of the most simple: because life is about more than money.
Did it ever really work?
This was a phrase my high-school economics professor used to remind us of often (usually as he was passing out test scores). A retired colonel in the military, he was truly one of a kind. While the phrase can be used in just about every area of our lives, it so perfectly describes the absolute importance in mapping out your financial future.
Notice it doesn’t say, “Prior planning prevents emergencies,” or “Prior planning prevents unexpected events.” Nothing can do that. Instead it focuses on you, the subject. If YOU want to perform, then YOU must plan to do it.
If planning for your own financial future doesn’t get you interested in the capital markets, then I don’t know what will. Understanding how our financial system and markets move is important for several reasons — not the least of which is so you can realize there is a LOT more going on than you will ever be able to control.
Just because you’ve planned for the unexpected doesn’t mean you’ll never be surprised by a financial cost or loss. Quite the contrary. You’ll quickly discover that choosing where to invest your hard-earned dollars is often the case of lesser evils. All reward comes with some type of risk.
From stocks to bonds and from options to treasuries, people who care about their financial future must be familiar with how the financial markets work.
People who take part in financial planning typically have higher credit, lower interest rates, and all-around better terms for financial products. If you are struggling to get approved for mortgage loans, auto loans, student loans, or even debt consolidation loans — try seeking a financial planner or using free online software to help get started.
Equally important, since financially planning almost always results in an improvement of your credit score, not only will you be able to get approved for loans — you’ll get better terms. Your credit score is often one of the key factors in determining the interest rate received for your debt.
Take buying a home for example: If you have a $250,000 mortgage at 7% interest you’ll be paying roughly $1663/month in principal and interest. If you take that same $250,000 mortgage and secure a 5% interest rate, your mortgage payment becomes $1342/month. Just by securing better terms on your loans (the result of proper planning), you would be saving over $300/month or $3600/year to live in the same house.
Are you starting to see a trend? You don’t need to be rich to do financial planning. Part of the secret to financial planning is discovering how to pay less for your current expenses so you DO have money to put towards savings, investing, and your future. I hope that makes sense because this is so often overlooked by those who say they can’t afford to do anything other than just get by.
While there’s some discrepancy as to whether or not Albert Einstein did in fact call compound interest the most powerful force in the universe, he is quoted as saying it’s, “The greatest mathematical discovery of all time.”
Now remember…this is the guy who discovered the theory of general relativity, helped alert Eisenhower during WWII that the Germans might be developing an atomic weapon (and that the U.S. should start their own research – that research went on to become the Manhattan Project which ultimately went on to result in the U.S. being the first and only nuclear weaponized country during the war), as well as publishing some 300 scientific papers, receiving numerous honorary doctorates in science, philosophy, and medicine from both European and American Universities, a 1921 Nobel Prize, and all around referred to as the father of modern physics! If THIS guy says that compound is the greatest mathematical discovery of all time, then I think we might want to take note!
Notice he didn’t say, ‘Compound interest is the greatest mathematical discovery if you have a lot of money.’ It’s the principal that is so mind-blowing, and it’s a principal we should all work towards with our own financial plan. There is no doubt about it: the concept of money creating money is powerful, possible, and probable when you take the necessary steps.
In Your Money Ratios, Charles Farrell asserts that the average person overpays for current living expenses to the tune of 10-15%. He also included things people don’t need in that number, even though I think we could all agree that our wants would make that percentage significantly higher.
In any event, let’s just say that you are an above average financial wizard and you spend NOTHING on extra, superflous items. By identifying that 10-15% of your spending that could be done cheaper, you’ve just essentially given yourself a raise (without working more hours or taking on a second job)
What could you do to plan for your financial future with an extra $4,500 – $15,000+ per year in your budget?!
Organizing your finances has a way of spilling over into other areas of your life. If you are looking for that catalyst to help set yourself financial footing on the straight and narrow, start with your money. It will tell you more about yourself than you probably wanted to know (but still need to know, nonetheless).
Warren Buffet, arguably the greatest investor of all time, has a famous saying that can be summed up like this, ‘I like to buy when everyone else is scared and be scared when everyone else is buying.’
Can you think of any better example of what people are scared to buy right now than real estate? Have you dreamed about building up investment properties that can supplement or even fully replace your current income? If so, now may not only be a good time to buy, it is always a good time to start planning for the future.
While having an investment property doesn’t guarantee you a good investment, having the money to consider this option starts with your own financial plan.
This might seem rather obvious, but it’s often the obvious truths that we so easily overlook. So many people dream about being financially free, and yet they do absolutely nothing to ensure this dream becomes reality. It’s almost as if they expect to wake up some day and just BE financially free.
If only it worked that way.
Financial freedom is often the result of long years of planning, sacrificing, and setting short-term goals. Maybe you want to have more time with your kids, maybe you want to travel, maybe you just don’t want to have a typical job — all of these things are decisions you’ll be able to make because financial freedom…
Options! Oh, what a glorious and equally terrifying word. While some of us may suffer from paralysis of analysis when faced with a decision, chances are good that every one of us likes to at least have the option to chose.
Nothing is more demoralizing and detrimental to financial planning than to feel you’re on a rat wheel from which you can’t escape (job, money, stress, etc). If you like the idea of having options for your financial future, you know what must be done.
Rational thinking has a way of going out the window when times are really good or really bad (which kind of feels like ALL of life, doesn’t it — it’s constantly at one extreme or the other).
Do you really think with $15,000 in credit card debt (and no plan to pay it off) that you’ll be able to get out from underneath it much less change the mindset that got you there in the first place?
Do you really think that house prices will ONLY go up over time and that it doesn’t matter if you get a loan for 103% of the homes value because of this?
Do you really expect the stock market to consistently give you 8-10% year in and year out?
These are just examples of ways people start thinking with the “herd” mentality. Everyone else is doing it, and they seem to be getting by just fine so it must be OK to do, right?
Financial planning has a way of bringing you back to your rational center. The very nature of planning has to do with realistically looking at a situation to determine a reasonable outcome — and an outcome that is specific to you.
Yes, there is some great financial advice that everyone should follow (ehhem…LearnFinancialPlanning.com…ehhem), but if you leave with just one morsel of wisdom today, I hope it’s this: rational, honest self-assessment must be present for you to actually change your current behavior.
If you don’t think you can do it on your own (and that is perfectly fine) seek out professional assistance so you can have someone thinking rationally for you.
Earlier we discussed that financial planning can help you determine when you want to retire (Number 91), but it can also help you retire how you want. Do you want to spend $3,000/month on travel? Would you like to spend the winters someplace warm? Start with the end-game in mind, determine how much it will cost, work your way backwards, and then start working towards it today!
Personal budget planning is perhaps one of the most painful (yet essential) skills any of us must learn to do when it comes to our finances even though just hearing the word “budget” can put chills up the spine.
Instead of thinking about budgeting like saying no to things you want now, try thinking about it like saying yes to bigger things you’ll want later.
Did you know that nearly 80% of people overpay on their taxes each year? And did you know that according to the US General Accounting Office approximately 50% of the people who use a professional tax service overpay their taxes to the tune of $1 Billion each year. And this is people seeking professional tax help!
If you are care about making sure the money you pay is what you actually owe (and not a penny more), financial planning can be a great way to make sure this happens.
From CDO to PPO and from CDS to MBS, trying to keep up with the latest 3-letter financial acronyms is a chore in and of itself. To help, check out this section on Investopedia’s site to learn all of the most common financial-related terms.
Honestly assessing your current financial landscape is the necessary beginning to achieving your long-term financial goals.
Five Cent Nickel put together a great article titled How To Become A Millionaire which ties in perfectly with financial planning. Even though a million dollars isn’t what it used to be, a million dollars is still…well…a million dollars!
Would you like to learn how to plan your way to millionaire status? Here are the highlights they suggest as filtered by Warren Buffet’s approach to investing and money management:
How much time do you spend making money decisions? How would you like to streamline that process? Financial planning lets you do this.
By deciding ahead of time how or what you will spend your money on, you free yourself from the agonizing back and forth as to whether or not you “should” buy something in the moment.
Remember what my economics professor said, “Prior planning prevents poor performance!” (Number 42).
Sure there are LOTS of things you can take the time to learn. From languages to cooking to specialized sports and more — the choices you have before you are literally endless.
But how many of those things can have a direct affect on your bottom line?
Who says you can’t have a little fun with your financial planning?
The phrase “I need a vacation” is probably something each and everyone of us has said at one point (or twenty) throughout our lives. If your tired of going on trips you can’t afford with money you don’t have while incurring debt you don’t need, (in your best Al Pacino from Scarface voice) say hello to my little financial planning friend!
Vacations are nice! Getting out of debt (and then being able to afford your vacation) is even nicer!
We’v spent a lot of time talking about all the things WE can do with our newfound resources, but what about other people? If you like the idea of doing more for others, and if you realize that so much of a fulfilled life is ABOUT doing things for others, this reason alone should prompt you to start planning your financial future today.
While it won’t add more hours to your day, financial planning is like that automatic virus scan running faithfully on your computer. It runs in the background and alerts you to problems as they arise.
Instead of having to manually decide every time a new financial choice is presented, your plan kicks in with the answer. If you’ve set aside $100/month for going out to eat and you’ve spent all $100 and someone asks you out – you know the answer.
The key here is to 1) setup your plan and 2) actually follow through with it. When you do this, you’ll invariably have more time to spend on the things you chose.
Do you want to own a second home someday? Is there a place you can imagine living for a few months out of the year? Financial planning will help you get there.
The whole point of financial planning, right?
Have you ever heard that question, “If money was not an object, what would you do with your time?”
Well…what would you do?
Financial obligations take up such a big part of our daily life that it is hard to imagine what it would be like to NOT have to work for money any more. Where would you spend your time if finances were no longer the focal point of your life? What passions do you have that currently take a back seat to your need for an income?
Dreams have a way of pushing us forward even when the present circumstances seem grim. It’s the hope that our future will be better than our present that drives us onward.
How often, though, when you stop to reflect on this do you realize that you are almost always in a mindset of “Tomorrow it will be better,” even though tomorrow never seems to arrive?
Here’s a simple way to self-assess yourself:
First you must stop and realize that there is nothing you can do about the past. It’s over. It’s done with, and you are simply wasting time and precious resources by dwelling on it.
Second, you must realize that you live in the here and now. Are you living life now or are you hung up on things in your past (or your future which is still unknown)?
Finally, how do you really see your tomorrow? Not the Halmark version of your future — but how do you actually see yourself in the future? Have you ever even considered it?
Non-business bankruptcy filings totaled 1,538,033, up 14.4 percent from the 1,344,095 non-business bankruptcy filings in September 2009. That’s a sobering reality. Every day some 4,213 individuals and non-business organizations enter into this most devastating of financial realities.
Not only does bankruptcy stay on your credit for 7-10 years, it has long-lasting effects on how you can access capital and debt for years thereafter.
Admittedly, some peoples’ bankruptcy is the result of their own making — and they have no one to blame but themselves, but what about the group of people who either through no fault of their own (medical bills trigger some 60% of bankruptcies) are dealing with this new prospect?
First, let’s briefly look at some ways people can avoid bankruptcy in 2011.
“You may be able to avoid bankruptcy if you sell some assets, cut back on your budget, make a deal with your creditors, and borrow money from family and friends,” says Laytoya Irby the Credit/Debit Guide at About.com.
But what do you think is the absolute best course of action you can take to avoid bankruptcy entirely?
A big component of modern financial planning is evaluating not only the resources you have and how to manage them, it also encompasses reviewing your risk profile to determine things like adequate insurance so you are not dependent upon your own “nest egg” should a financial or medical emergency arise.
Education, as we shared above, is only getting more expensive (Number 97). Do you have a desire to go back and further your education at some point in the future? Have you thought about how you will pay for it, or are you just expecting the money to show up someday?
While there are numerous government grants and financial aid resources for those who return to the classroom late in life (and many employers will pay for part, sometimes all of your schooling if you work for them during the time), this is yet another reason why organizing your limited resources to their maximum potential is an absolute necessity.
Again, this seems so simple on the surface, but people miss it time and time again. The ONLY way you will ever build wealth and safeguard yourself from emergencies is if you have a plan (or win the lottery, but I like my odds with a plan better).
Organizing your financial world is like stretching before a good workout. Few people like to do it, but the preparation is critical. Relaxed muscles and tendons are now more conditioned to actually do the work set before them.
It’s the same with your finances. By honestly and accurately assessing your financial world, you will condition your mind to be ready for the work before you. It’s not easy…but then again, nothing that is worth doing ever is.
Did you know you could get 1000% or more return for your current cash savings with absolutely no risk? The average bank account pays somewhere around .08 – .15% interest on your savings whereas several leading online banks (many from household names you are probably familiar with – see below) pay at least 1% and higher.
If you have $5,000 in savings that’s a difference of $45/year. If you have $50,000 that’s a difference of $450/year!
So where does the “no risk” come in? Make sure the online savings accounts are FDIC insured. This ensures that your savings, currently up to $250,000, are guaranteed by the U.S. Government. When you’re done reading, review our recommended online savings accounts at the top right of this page.
If only we had a few more teeth to stick under our pillows!
On average, it costs about $3,000/month per person to travel the world in a year. If you are a 5-star all the way kind of guy or gal, that number could be higher.
“I expect to pass through life but once. If therefore, there be any kindness I can show, or any good thing I can do to any fellow being, let me do it now, and not defer or neglect it, as I shall not pass this way again.”
Does the idea of putting money to work for you seem like a totally foreign concept? Can you imagine the day where…instead of getting up to go work for money…money instead works 24 hours a day, 7 days a week for you?
If you can not, then let me encourage you to change your thinking!
The ultimate goal of financial planning is to set in place the checks and balances necessary to move you from working for money to making your money work for you.
Take the tidy sum of $1,000,000 for instance. Assuming a measly 6% return per year, you are looking at $60,000 in income (before taxes) without touching a penny of your principal.
A million dollars may seem like a lot of money given your current financial outlook, but saving and investing your way to this sum is extremely doable. Putting money to work for you is the ultimate goal of financial planning, and if you aren’t thinking in those terms…start today!
Translated: Take control of your money’s future instead of expecting the future to take care of your money. Do you see the difference?
Gone are the days of No-Doc, Stated Income, or Negative Amortization loans (thank goodness). In today’s financial world, you actually must have some skin in the game (gasp) before the banks will lend you money for a home.
While the number can vary, a good rule of thumb is a 10% down payment for first-time homeowners and 20% for existing homeowners. With the median U.S. home price – the point at which exactly half of homes are sold for more and the other half sold for less – standing at $185,475…chances are you are going to have to plan your way to saving that $18,500 – $37,000 necessary to secure a loan.
Did you know that a one-time $100,000 nest-egg today would be equal to $4.69 million dollars in just 50 years assuming an 8% annual return. In 100 years that same $100,000 would be worth $220 million!
If you want more out of your financial world than just the status quo, starting down the road to financial planning will be one of the most rewarding decisions of your life.
Yes it will be hard (at times). And yes it would be “easier” to do nothing (although you are just creating a ticking time bomb for yourself) — but like anything in life that is worth doing — it will involve sacrificing now for the hope of what is to come!
Buffett didn’t get to be the world’s richest man because he followed the crowd, nor would he advise those who wish to follow in his footsteps to pursue conventional wisdom.
True wealth is about understanding the choices before you, calculating the risks, and then making a decision. Every single one of us operates with limited resources, limited knowledge, fears, anxieties, reasons why we shouldn’t do it, and more — even Warren Buffett.
The size of your savings account doesn’t change that fact, and it shouldn’t keep you making the tough financial decisions we all have to make.
You might like managing your own money so well that you wouldn’t mind getting paid to do it for others. A financial planner salary can produce anywhere between $45,000 – $85,000+ per year.
…then you’ll always get what you’ve always got! Are your money habits producing the kind of outcome you were hoping for?
As our good friend Albert Einstein said, “Insanity [is] doing the same thing over and over again and expecting different results.”
So here we are…the Number 1 reason that YOU need financial planning is so that you can be ready for anything. Life has a way of happening whether we are ready for it or not, and if you want to be prepared for the financial curve balls that are sure to come your way, make today the day you plan.
Be sure to read our original Financial Planning 101 series below.
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