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Financial Planning for 2018

At this point of the game, surely we all know how important it is to have a plan for how we should approach our finances.

Yes, we want to enjoy ourselves and indulge a little, but with the current political climate and approved changes to our tax code, it's definitely time to revisit the plan. So here's some questions to ask yourself:

  1. Do you have a budget?

  2. Do you have emergency savings?

  3. Do you know how much debt you have? If you have debt, do you have a plan for getting rid of it?

  4. Are you saving for retirement?

  5. Do you have adequate coverage for your family in case something happens to you (disability, life insurance, etc)?

Your budget dictates the outcome of pretty much every other question. It is a clear look at how much is coming in and how much is going out. You have to be real with yourself on this one - no fudging allowed. If you're not sure where your cash is going, track yourself for two weeks. Write down everywhere you spend money, no matter how minor, even that paltry $1.25 tip you gave the GrubHub delivery guy. You will be shocked at where some of the cash goes! That $4 a day Starbucks habit, those $15 lunches and Friday night boozing with friends for $50... no wonder nothing is left over each pay period! (Unless you have some means for passive income... just saying.)

Once you track yourself, do a real assessment of where you can pare things down so that you can save smarter. There are some great apps out there like Mint (I actually use this) that can help you track where all of your money is on an ongoing basis. If you haven't cut the cord already, come on now - get with the times. Take a look at all the areas where you can save money and above all, remember to pay yourself first by saving 10% of your net paycheck to savings automatically -- to start. You eventually want to increase this, but this is a good starting place. Don't even question this one because you need that readily available money in case of an emergency.

Emergency savings is so important to have on hand. Think of the last time you had an unexpected expenditure - how'd you pay for it? Cash or credit? For the absolutely last line of defense, sure, your credit card is your big backup. But the emergency cash savings gives you a buffer against the unexpected. Start with $1,000 and continue to automatically contribute to your emergency savings until you have 3 to 6 months of savings in the bank. A loss of a job or sudden illness will thank you later. If you can, stick your money in a place where it is accessible, but not TOO accessible (ahem, temptation). Let the money work for you by stashing it in a high-yield online savings account - choose one with no monthly fees and no required minimum balances.

Debt: the noose that hangs around the neck of so many in the United States. Student loan debt is a devastating pull on 20-somethings going out into the workforce fresh out of college to the tune of tens of thousands of dollars. Add onto that credit card debt, car loan debt and many other types that can decimate what marginal efforts you have made on the savings front.

One quick way to do this would be to consolidate your debt into one payment. Note that this is really only worthwhile if the interest rates are low AND if you keep the debt off. Use reputable services to do this! There's a lot of schemes out there, so do your research and run the numbers. Otherwise, use the debt snowball method to pay things down gradually. Remember: running your credit cards back up pretty much defeats the purpose of this strategy. And most importantly, do not close your credit card accounts! They are heavy contributors to your debt-to-credit ratio and is a key determinant of your credit score - and trust me, you want to protect your credit score.

Also keep in mind one important thing: interest rates are on the rise. As interest rates go up, so do the rates on your revolving debt. Don't pay more for no good reason.

Then there's retirement. When you're in your 20s and 30s, retirement is probably far from your mind. But it's during these years that the most money can be built! Most importantly, if your employer provides a 401k plan with a match, it's a no-brainer to participate at least to get the "free money". Get that MONEY! My favorite retirement suggestion is to either contribute to a Roth 401k (post tax plan that allows you to save as much as a standard 401k) or to contribute to a Roth IRA. Why post- tax? Look at it this way: while you can take advantage of the tax savings NOW, you will likely be making more money in the future and will be in a higher tax bracket. If you delay payment of taxes until when you retire (like with a standard 401k), you're paying taxes on your distributions at that higher rate. If you use the Roth option, pay the taxes up front at the lower rate, then take advantage of your distributions tax-free.

So! You've got all of the above items working... what's next? If you have a family (just a couple or couple + kids), you'll want to protect your spouse and family in case something happens to you. No one likes talking about getting injured or dying, but they are parts of life that we cannot ignore. Things like disability and life insurance are important parts of your overall financial picture, especially when family is involved.

Disability insurance pays a portion of your income if you are unable to work due to illness or injury. In some states, your employer is required to provide basic disability coverage, but in others, you are able to purchase it on a voluntary basis. Here's a great article from NerdWallet that goes thru the nitty-gritty of disability insurance.

Life insurance is a slightly different animal. There's an unfortunate negative connotation about it that is unfounded. I worked for a life insurance agent for years, and the approach was always from a place of ensuring the client and their family had enough coverage to not only potentially supplement their retirement income, but leave a good amount as part of "generational wealth". You can't take it all with you, and if you love your children (which I hope you do), you'd like to set them up when you go.

Read this very interesting article on HuffPost about 3 Powerful Secrets The Wealthy Know About Life Insurance. It is the difference between living a good life and setting up a great life for your heirs. Life insurance is one of those things you should talk with a broker about to discuss what you want out of it. The two main types of life insurance are simple enough to understand: term life is coverage for a certain number of years and is very cheap - there's no cash value. Whole life is coverage for as long as you pay the premiums and builds a cash value. Again, talk with a broker about a strategy.

So you must be saying... Christine! All of this information is nice and good, but I haven't heard you talk about investing in the stock market? Isn't that where the big money is being made?

Sure, the stock market historically has been the driver of wealth. Unfortunately, a lot of people were soured on the market after the Great Recession and now refuse to get back into the market. I can't say I blame them. The recession really brought to light the excesses of Wall Street and all of the related nastiness of corporate greed, misuse of taxpayer money and overall incompetence. But here's the thing: if you don't do the above things, there won't be room for investing.

There's no better time than the present, so get on it!

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