Good money habits are like the tenets of healthy living: Save your leafy greens, don't overindulge on debt, build up your core savings, and lift with your legs, not your back.
Of course, as we age, our minds, metabolism and money issues change. What's right for our twenty-something selves isn't the same as what's appropriate for our fifty-something selves. (Take the old adage about saving 10% of your income. Great advice if you're 25; lousy if you're starting at age 50, as the retirement savings guidelines in this article show.)
Still, for the most part, we know what challenges we're going to face:
- In our 20s and 30s, we're financially focused on the present and near-future, not so much our long-term investing plan. This is life stage when the earning-spending balance can get out of whack. Strong swimming skills are required so that debt (credit card, mortgage, car, student loans) doesn't pull us under.
- From age 40 to our mid 50s, financial reality hits -- "Hey, I better get serious about saving for retirement" – and our financial limitations become more obvious. Our sprinting days are coming to an end as we focus more on making sure our investments have the stamina to finish the marathon. In many ways we're much stronger than we were in our youth: These are theoretically the peak earning years, but paying for college, saving for retirement, funding fun stuff (e.g., travel) and not-so-fun-stuff (e.g., your parents' well-being) all vie for a piece of that paycheck.
- Avoiding injury is key for those ages 55 through 69, when the focus morphs from amassing wealth to protecting its worth. We seek shelter for not only our assets, but our family's way-of-life. With a shorter time horizon we tend to favor safer investments (easier on the joints and stomach). Taxes, estate planning and insurance move up our list of money priorities.
Of course, life is sometimes unpredictable and financial aches, pains and strains happen. You lose your job right after you buy a house with your new bride. Your son declares a new major the semester before he's supposed to graduate. The market takes a dive just as you start to build your retirement getaway.
How to avoid financial injury
Life happens. But financial injury need not be debilitating. Flexibility, foresight, and some Advil will help you bounce back. But what will help you most is having a detailed financial plan.
There's a difference between managing your finances and having a financial plan. Managing your finances is like running on a treadmill -- it helps you get and stay in shape. Having goals is what motivates you to stick with it for a lifetime.
A financial plan -- one that you consult on a regular basis -- takes the guesswork and stress out of managing your finances, no matter what life stage you're in. It helps you project future costs, illustrates how your current savings match up with them, pinpoints current and future financial issues, identifies weak spots, and provides a much-needed wakeup call regarding savings, spending, and knee-replacement surgical costs.
A plan that includes a destination -- something to run toward -- also helps you get more out of your daily money workout. Instead of just running on autopilot day after day (which can lead to disastrous investing results in your portfolio), you've got milestones to help track your progress and keep you on course.
Sure, there are some people who are motivated simply by the idea of being fiscally fit. But even they are prone to injury, and when faced with a life-changing event, are less prepared to deal with the financial repercussions than those with formal goals in place.
Measure your fiscal fitness level
Got goals? Of course you do. Are you on track to achieve them? You are if you can answer these four questions posed by my colleague Robert Brokamp in this article:
- Given the value of your entire portfolio -- not just your market-crushing picks -- when will you be able to retire?
- How much income would your portfolio produce in 10 years? Twenty? Tomorrow?
- Given that you'll have to sell investments to pay your retirement bills, how do you know your portfolio will last as long as you do?
- How will you keep taxes from devouring your gains when you do sell?
Ready? Set! Calculate! Just kidding. Don't panic if you suddenly feel like a 98-lb. weakling. They aren't easy questions, but they do demand answers if you want your finances to remain healthy and age gracefully.
Whip your finances into shape
There are a lot of ways to formulate a financial plan.
Our Retirement area has tools and advice to help you put your plan on paper. There's a primer that'll give you a good overview, an introduction to asset allocation, and calculators to help you run a few scenarios.
But even though we Motley Fools are proponents of self-motivated, DIY-style money management, we readily acknowledge that a lot of people do much better under the guidance of a personal financial trainer.
A good financial pro -- which we define as one who is objective, affordable, and acts in your best interests rather than their own -- can help you craft a fiscal fitness plan and help you manage specific financial hurdles while minimizing cartilage/cash damage. (We've partnered with the Garrett Planning Network to offer Fool readers a free fee-only financial planner for a test-drive. See details below.)
No matter what kind of help you choose, when it comes down to it, your money, like your health, is your responsibility.
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