Having a personal plan is the critical first step to organizing your finances and financial planning.
Financial planning may seem daunting, if all you’ve ever done is pay bills and manage a checkbook. But personal planning is really, the first step to organizing your financial affairs and depends more on common sense than math skills. Here’s a quick and simple guide to getting your financial house in order.
- Get your records together.
Head to your local office supply store and pick up an inexpensive accordion folder that will organize the following documents:
- Bank, insurance, mutual fund, and brokerage statements, including individual retirement account (IRA) statements;
- Retirement plan statements from your employer’s 401(k) or other qualified plan;
- Records from any other sources of income you receive, such as certificates of deposit (CDs) or savings bonds; and
- List of debts, including your most recent monthly mortgage statement, credit card statements, home equity line statement, car loans, education loans, etc.
- Focus on your debt picture.
How much do you owe? How do you intend to pay it off? What interest rate are you paying on each type of debt? You need to have a clear picture of when you realistically expect to retire these obligations. It usually makes sense for you to pay down your highest-interest-debt first, although some financial planners recommend taking care of accounts with the smallest balances — this can give you a positive psychic boost. If you are paying just the minimum monthly finance charge on your credit cards, it becomes nearly impossible to get out from under the debt cloud. If this is your situation, think about ways to cut spending, and use those savings to pay off your cards as quickly as possible.
- Know how your retirement is invested.
Are you taking too much or too little risk given your lifetime goals? A useful rule of thumb is to subtract your age from 100; you might use this number as the percentage you want to invest in stock funds. (Of course, if you are uncomfortable taking on stock market risk, or have a near-term use for your savings, this approach may not be appropriate for your situation.)
In addition, most retirement savers don’t need exposure to complicated investments. Stick to funds you understand, and rebalance them about once a year to your target allocation. (That means selling your winning funds and investing the proceeds into your underperforming funds, so that you maintain the amount of risk you’re comfortable taking in your portfolio.)
If you lack the time, interest, or basic knowledge to manage your investments, consider hiring a financial advisor, or allocating your contributions to a target-date or target-risk fund if one is offered in your retirement plan. These funds take the work out of managing your portfolio, as the fund managers make investment and asset allocation decisions for you.
- Build a working budget.
To get a handle on your spending, build a budget. Start by listing the expenses you don’t have a choice about spending. Rent/mortgage, food, child support, health insurance, utilities, clothes, transportation, and taxes all fall in this non-discretionary spending category. Then, add in discretionary items, such as travel, entertainment, hobbies, charitable donations, etc. Don’t forget to include your retirement plan contributions, since they will be a major source of income when you stop working.
Financial planning can be a very complicated exercise that considers many sources and uses of your money, assumptions about investment returns, interest rates, and future goals. Personal planning, however, is a common-sense approach that helps you quickly gain perspective on what you own, what you owe, and the simple steps you can take to become more financially independent.
Next Step: Speak to a Financial Advisor
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Disclosure: This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. LPL Financial and its advisors are providing educational services only and are not able to provide participants with investment advice specific to their particular needs. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
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© 2017 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this newsletter are those of Kmotion. The articles and opinions are for general information only and are not intended to provide specific advice or recommendations for any individual. Nothing in this publication shall be construed as providing investment counseling or directing employees to participate in any investment program in any way. Please consult your financial advisor or other appropriate professional for further assistance with regard to your individual situation. MKT-0934-0717 Tracking # 1-615993
