If you don't have a formal financial plan, you're not alone. Only 49% of Americans have a long-term financial plan in place, according to Capital One's Financial Freedom survey, but without one, you may have trouble staying focused on and meeting your goals. Now, the good thing about financial planning is that you can really start at any age; there's no such thing as being too old or too young. Furthermore, financial planning is something you can do solo or with the help of an advisor. If you'd rather go the former route, here's how to get started.
1. Think about the major expenses you'll encounter in life
In the course of life, we're all bound to face our share of big-time expenses, like college, buying a home, or paying for a child's wedding. And then there's the one whopping expense we should all be thinking about: retirement. No matter where you are career-wise, it helps to create a timeline for these expenses so you can see how many years you conceivably have to save for them and start putting money aside accordingly.
Of course, some of these expenses are easier to estimate than others. The average U.S. wedding, for instance, costs somewhere in the ballpark of $30,000, so if you expect to be throwing one in, say, roughly three years, you can do the math and know how much money you need to save annually to get there. Retirement, however, is a lot trickier to nail down, as your costs will depend on factors such as your health, your lifestyle and hobbies, and the number of years you ultimately live. As a starting point, however, retirement currently costs the typical American $828,000, so that's a figure you can work with to establish a savings plan.
2. Evaluate your insurance coverage and needs
We all need health coverage for the medical expenses we'll inevitably face, but as your circumstances change, so too might your insurance needs. A high-deductible plan might work for you when you're younger and hardly get sick, but as you get older, you may need to think about paying a higher premium for a plan with a lower deductible and better benefits.
Then there's life insurance to think about. Many people wonder if they need life insurance, and the answer is this: If you have anyone who depends on you financially, whether it's a spouse, child, or sibling, then you need life insurance to protect that person (or people) and buy yourself some peace of mind. There are several types of life insurance you might choose from, and the cost of your premiums will depend heavily on your age, your health, and the amount of coverage you purchase. An insurance salesperson or financial advisor can walk you through your options and get you quotes, but it pays to do some research ahead of time to know what you're dealing with.
Finally, there's long-term care insurance, which can help defray the cost of nursing homes, assisted-living facilities, and other such care you might need as a senior that isn't covered by Medicare. It's estimated that 70% of seniors 65 and over will need long-term care in their lifetime, so working that into your financial plan is crucial.
3. Devise a retirement savings and investment strategy
Maybe you don't have a child who's planning on college or a wedding to worry about. But you will need to set aside money to cover the bills once you're no longer working, so to that end, you'll need a strategy for saving and growing wealth.
First, the savings part. Your goal should, ideally, be to set aside 15% of each paycheck (if not more) for retirement alone. Where will that money come from? You may need to rethink your budget and cut some corners to allow for more savings. That could mean unloading a vehicle, downsizing to a smaller living space, or eliminating some smaller but non-essential bills, like the gym membership you enjoy having but rarely use. You should also plan on banking your raises as your earnings increase so that you're doing better savings-wise year after year.
But you don't just want to stick all that money in the bank. Rather, it should go into a tax-advantaged retirement plan, like an IRA or 401(k), where it can then be invested in stocks and bonds to further its growth. Now, your investment portfolio should preferably contain a mix of both, but the way you allocate your assets will depend on your investment horizon and appetite for risk. If you're relatively young -- say, in your 30s or 40s -- you'd be wise to lean on stocks for their aggressive growth, especially since you have time to ride out the market's ups and downs. But if you're much closer to retirement or are extremely risk-averse, you may want to go with a more conservative, bond-oriented strategy.
Your Social Security benefits should also be woven into your retirement savings strategy. Be sure to read up on how the program works and learn how you can maximize your benefits to get more money once you start collecting.
Putting some thought into your future will increase your chances of actually meeting your long-term goals. If you've yet to devise a formal financial plan, take the time to identify your big expenses, get the right insurance coverage, and develop an investing strategy that works for you. It's a far better bet than sitting back, winging it, and hoping for the best.