Some people think financial planning is only for the rich, but in reality, anyone can benefit from a solid financial plan, regardless of age or income level. And apparently, more Americans are coming to agree with this sentiment. Back in 2012, a study by the Certified Financial Planner Board of Standards found that only 31% of U.S. households had a financial plan. But according to TD Ameritrade's Goal Planning Survey released in September 2016, 56% of Americans 25 and older have a financial plan in place. Whether you're first starting your career, preparing for children, or counting down the days to retirement, having a financial plan can benefit you in more ways than one. And you don't even need to hire a financial advisor to craft one.
Benefits of financial planning
People who have a financial plan are more likely to be in control of their finances than those without one. In fact, 64% of Americans with a plan feel that they have a good grasp on their investments and understand how their assets are allocated.
Those who have a financial plan also have a lot more confidence in their ability to reach their personal retirement goals. TD Ameritrade reports that 85% of people with a plan feel good about their chances of retiring, whereas only 28% of those without a plan feel the same way.
Interestingly enough, those with a plan also tend to have higher savings goals for retirement. TD Ameritrade found that planners aimed for $1 million on average, while those without a plan set their sights on $893,000 as an average target.
But while planners may be inclined to aim higher than non-planners, what's more telling is the fact that planners actually save more. In fact, those with a plan have almost double the amount of retirement savings as those without one ($460,000 versus $239,000). If you don't already have a plan in place, that fact alone should motivate you to get started.
What should your financial plan entail?
The beauty of financial planning is that you can set up a strategy that suits your needs and goals. You don't have to follow a particular template or even hire an advisor (though 35% of planners do seek outside help). Financial planning commonly covers aspects such as:
- Short- and long-term savings goals
- Investment strategies
- Tax planning
- Insurance (including health, life, and long-term care)
But your financial plan doesn't have to be strictly business. If, for example, you're hoping to buy a new television this year or want to save for nice vacation, you can incorporate those wants into your plan and see how they fit in with your finances. Furthermore, you can, and should, change or adapt your plan as you move through various stages of life.
If you're in your 20s or 30s, your financial plan might include items such as:
- Building an emergency fund
- Saving up to buy a home
- Paying down student debt
- Setting money aside for retirement
If you're in your 40s or 50s, you might already have an emergency fund in place, and your student loan payments might be a thing of the past. In that case, you might instead choose to focus on:
- Saving for college
- Eliminating credit card debt
- Ramping up retirement savings
Finally, if you're in your 60s, your plan might include:
- Maxing out retirement contributions
- Paying off your mortgage
- Arranging long-term care insurance
A big part of establishing a financial plan involves figuring out what's most important to you and taking steps to achieve those objectives. But if you map out your goals, you'll stand a better chance of staying on course and eventually meeting them.
For example, if you set a goal of retiring in 30 years with $1 million, as opposed to just retiring at some point in the future with however much money you can accumulate, you can map out a savings strategy that will enable you to sock away enough cash in time. That strategy might include front-loading 401(k) contributions when you're younger to take advantage of compounding, and then cutting back on contributions later in life to pay off your mortgage. Or, it might involve saving the same amount of money each year so you're not losing too much spending cash at any given point in time.
No matter what your financial plan entails, creating one is a good way to stay accountable and work toward something tangible. And the sooner you develop your plan, the more time you'll have to chip away at those goals.