In the journey of life, having a financial plan is a necessity. Think of it as the GPS that guides you through the financial wilderness, ensuring you’re prepared for whatever craziness lies ahead. Set off without a plan and you run the risk of getting lost in debt, wandering around in circles trying to pay off interest, or even ending up at a dead end of bankruptcy. But don’t worry, a little foresight and good planning can go a long way!
Why You Need A Financial Plan
Financial planning isn’t just about crunching numbers, it’s about understanding how life’s ups and downs can impact your financial goals, and how managing, saving and investing could help you achieve them. While putting off financial planning might seem harmless when life is smooth sailing, a startling statistic from Business Insider reveals the risks behind not being proactive about managing your finances: The average American household wrestles with a little over $100,000 in debt, including mortgages, credit cards, and student loans.
So as the saying goes, the best defense is a good offense: managing your finances strategically and planning for all possible outcomes.
Five Life Events That Demand a Financial Reevaluation
Life is full of surprises, some pleasant, and some that could require a complete overhaul of your financial plan. While some transitions may require adjustments to your financial plan, view them as opportunities to strengthen your financial foundation. Here are five key life events that can be springboards for achieving your financial goals:
- Marriage: Tying the knot isn’t just a celebration of you and your partner’s bond, it’s also an important time for financial planning. While not exactly romantic, talking about money openly before you get married is necessary for getting on the same page about your goals, and it can help you avoid fights later.
- Parenthood: The sweet pitter patter of little feet will transform your entire financial landscape. From weekly grocery costs to insurance coverage to college savings, becoming a parent means reprioritizing your finances to ensure your little ones’ needs are met without sacrificing your own financial stability.
- Health Challenges: Illness can strike without warning, affecting more than just your physical well-being: It can also derail your financial plans. Investing in comprehensive health coverage and a healthy retirement fund could reduce these risks. The truth is that your health comes first.
- Job Loss: Losing your income stream can impact everything from covering monthly bills to contributing to your bigger savings plans. Remember that reserve funds or severance packages can only keep you afloat for so long. Having a plan can help you adjust until you get your feet back on the ground.
- Retirement: Make sure your golden years are just that. Remember that while some company plans, public pensions, or 401ks might have you covered, you may need to supplement your savings plans with other investments, depending on your needs. And even if you plan to retire later, it might be a good idea to have a financial plan in case you have to retire earlier than expected.
Spring Cleaning Your Finances
Here are a just a few strategies that may help you keep your finances strong in the face of change:
- Review Financial Goals: Regularly reflect on your financial objectives to ensure they line up with your current life stage and aspirations. What you started saving for at 25 might change by the time you are, say, 45.
- Keep a Safety Stash: According to Fortune, 22% of Americans lack an emergency fund. The good news is that it’s easy to prioritize building up your reserves.
- Keep Track of Your Investments and Policies: Long term investments like stocks, index funds, and policies can be a great way to build up your nest egg. But make sure to check up on them regularly to assess whether they’re getting you the returns you want.
- Track your debts: Make a list to manage them effectively. This could help you pay them off faster and reduce stress.
- Update Personal Documents: Big life events like marriage or childbirth mean that you should be making updates to vital documents, including estate plans and insurance policies. Ensure your legacy is preserved as you intended.
Here is a video from CBSN that provides more tips on how you can spring clean your finances.
FAQs on Financial Planning
What is a financial plan?
- A financial plan is a roadmap for future financial decisions designed to achieve specific financial goals.
Who needs a financial plan?
- People who have an understanding of how their finances work should have a financial plan. It is also great for those who have other people relying on them financially.
Why is financial planning crucial for wealth achievement?
- A financial plan breaks down the journey to wealth into manageable steps, providing a clear path to financial success.
When should I review my financial plan?
- Regularly review your financial plan to accommodate life changes, ensuring it remains relevant and effective.
How do I create a financial plan?
- Start by assessing your current financial status and defining your future goals. Then, outline the steps needed to bridge the gap between your present and desired financial situation.
