Four Financial Planning Steps to Help You Build a Better Future
It is never too late to improve your financial situation, and it is never too early to start thinking about financial planning, retirement, or saving up for a large purchase like your first home. While I am not a financial advisor, there are some basic tips and strategies to begin moving in the right direction. Having taken these steps myself, though, I can help provide some firsthand advice to improving your financial health.
The first step in improving your financial health is to take a look at your budget. Make a list of the “Have-To’s” for each month. Have-To’s would include rent, car payment, electric, food—the necessities. It is important to make sure that you have these expenses covered each month. One thing that I do to help is setting up automatic payments for every regular bill that allows it. That way I know everything is getting paid on time.
Next look at the “Want-To’s.” These are the things that you want but don’t really need, like that coffee from Starbucks each morning. (One could argue that is a need...but be honest with yourself when doing this—maybe making your own coffee at home is acceptable.) Which Want-To’s could be cut out to help lower your expenses? Maybe you like going out to eat but could manage getting takeout twice a month instead of three times.
Now examine how much money you have left each month. Can you afford to put that aside as savings? Look around the edges for small ways to cut your spending that could help build your savings, like bringing lunch to work instead of buying it or walking short distances to cut down on gas money.
It also helps to have a specific goal of what you are saving for. Are you saving for college, a home, a car, retirement, a vacation? You can set up separate savings accounts for each of your major goals if that helps you avoid spending that money.
Another option to consider is a higher-yield interest rate account. Something like a Money Market account can have an overall better interest rate, with the downside of having a limited number of monthly transactions. This can be a good place to save money while still having it readily accessible in case of emergencies.
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Certificates of Deposit (CDs) are accounts that require a certain amount of money to be deposited and have a set time limit. This will vary from one institution to another, but as an example, a CD may require a $1,000 deposit to be held for a six-month term. While CDs can have a higher interest rate, they also come with a penalty if you need to withdraw funds before the term is up. Balancing your savings goals with your short-term financials needs is important when considering what account(s) to go with.
Ideally you can keep enough in readily available savings to cover your Have-To’s for at least six months as an emergency fund. Readily available means either a savings or Money Market account that you can make a transfer from without penalty. Once you’ve built up your savings, it is easier to branch out into things like stocks, mutual funds, and other ways to save that might be longer term.
Here is where talking to a financial advisor is going to be beneficial, but there are some general tips to keep in mind for your financial planning. If your employer has a 401(k) or other retirement plan, make sure you are enrolled. Some employers will match contributions up to a certain percentage—if they do, make sure you are contributing as much as you can to take full advantage. Your contribution comes out of your paycheck automatically, so once it’s set up you most likely will barely notice a difference. Just getting a retirement plan started is a great way to build toward your future, and the sooner you get it started, the better, as it will give that money more time to grow.
At the risk of repeating myself, talk to your financial advisor to find an investment approach that works for you. They can guide you on what makes the most sense for your needs based on budget, what you’re saving for, and how much risk you can tolerate. They can also advise you on whether stocks, mutual funds, or some other type of investment is best for you.
As noted, there is a level of risk when investing in stocks, mutual funds, cryptocurrencies, etc. Generally speaking, you can afford a little more risk when you’re younger, while older folks will most likely want to look at more stable options. Diversifying is the name of the game here—don’t put your eggs all in one basket! Putting everything into one type of investment could end up with a poor result. Having a good diverse portfolio makes it more likely that even as some things go down in value, others will go up. Certainly the long-term trend of the market has been that it will increase over time. Though there is no guarantee of anything, you give yourself a better chance by diversifying.
PUTTING IT ALL TOGETHER
As I work to get my own financial world in order in my early 40s, I have a good variety of savings, investments, and 401(k) funds. My savings account has enough to cover me for six months in the event of an emergency. I have budgeted for my Want-To’s and know how much I can spend on fun things (which hopefully will include going to Magic tournaments and Broadway shows once it is safe to do so again). I’ve got my retirement plan set up through my employer and have worked with my financial advisor to invest in mutual funds. I have even taken a small amount of money (that I can afford to lose) to play around with in one of the apps that allows essentially free stock and cryptocurrency trading.
All that isn’t to say that my finances and financial planning are perfect. Though I feel much better about my financial future than even this time last year, there is always more to learn and more we can do to improve our finances. Imagine where I could be if I had started this twenty years ago!
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The views and opinions expressed in this blog are those of the authors and do not necessarily reflect those of VSECU.
About Seth Kerin
Seth is the PSCU experience lead, working directly with our extended Contact Center to help improve the member experience. He graduated from Saint Michael’s College with a BA in English and is a longtime resident of Montpelier, and more recently Barre. In his off time he enjoys writing novels and spending time with family and friends.