Even the best laid plans sometimes result in failure, but the benefits of looking ahead are nonetheless clear – especially concerning money matters. For some facing financial challenges, poor planning may be the culprit – leading to various cash-related difficulties.
Financial advisors recommend various strategies to head-off money problems, including well-conceived planning. Depending upon your current age and financial status, planning may account for pending expenses like college tuition, the birth of a child, or a major purchase. In each case, your advanced preparation may make the difference between financial success and a struggle to make ends meet.
Individual planning sessions account for each person’s financial responsibilities and resources. This measured look at earning power and outstanding financial obligations provides a starting point, from which effective long-term planning grows. Your personal plan will take its own shape, but considering these benchmarks may be useful as planning unfolds:
One-year plan – Priorities and debt reduction
Financial planning has to start somewhere, so an initial one-year look keeps the process manageable – while delivering results for first-timers.
Reduce Debt – At times during your life, personal debt levels may be higher than you’d like them to be. As you create a formal financial plan, start with a close look at your credit card balances and other outstanding debts. If monthly obligations threaten your household cash flow, making it difficult to keep up with payments, reducing debt is a one-year priority. It may take longer than that to pay-down balances, but this key aspect of financial management calls for immediate attention.
Establish Priorities – Financial planning is beneficial at any stage of life, but an early start enables young people to establish priorities and set-about achieving goals. College education, for example, taxes budgets, so proper planning helps anticipate expenses and direct resources toward the extraordinary cost of higher education. For those with existing student debt, a reasonable one-year plan might include starting repayment or doubling-down on monthly principal payments.
Five-year plan – Savings and acquisition
Depending upon the priorities set in your one-year plan, the follow-up period may be marked by amassing personal savings and making major purchases. Your five-year plan may look like this:
Make a Major Purchase – Prospective home owners need down payments, so saving for this major purchase is an important financial challenge for would-be buyers. Like other purchase plans, once home ownership is established as a personal goal, financial attention shifts to setting-aside funds. Although residential real estate markets have recovered following the major industry meltdown, and inclusive measures expand financial access for some borrowers; planning for a major purchase should include a solid credit score.
Set up an Emergency Fund – In addition to accumulating reserves for a home or other major purchase, contributing to a personal emergency fund is a worthy 5-year plan. Automatic withdrawals and other forms of assistance simplify the process for those unable to maintain regular contributions. Emergency reserves provide fast funding for medical expenses, short-term layoffs, unexpected repairs and other pop-up costs of living.
Beyond five years – Investing and retirement
Investing is an essential part of successful money management, so buying stocks, bonds, mutual funds and other holdings should never be delayed. As you work toward retirement age, however, setting-aside funds becomes even more important, as time runs out for growing wealth.
Periodic evaluation ensures your personal planning stays on-track. Changes to income, for instance, alter your financial landscape, so it is important to account for shifts as you go. For example, it may be possible to set more money aside each month during prime earning years, so adjusting your plan helps maximize investment potential.
Professional financial advisors are well-equipped to analyze your financial conditions and make money management recommendations. With their guidance, crafting a short-term (1-3 years) and long-term financial plan (5 years and beyond) provides the clearest path to prosperity and financial health. After an initial review, assessing income, spending, debt, and other aspects of your finances, it is important to revisit personal planning annually, at a minimum, ensuring your financial plan always reflects your goals and priorities.