Most things need a plan, and so do your finances. The earlier you start, the better you can align your money with your goals, whether paying for college, a home, investments, or retirement. Here are five key steps.
Don’t keep your goals in your head. Write them down. Identify the things you’ll need to pay, advises US News. It could be any of the following: Education for you or your children. A home. Medical care. Investments. Travel. Living expenses. Retirement. It could be any of these combined.
Write down how much you need to save to reach your goals. Then, if needed, write down a plan on how you might make adjustments to your lifestyle and spending habits to meet your savings needs.
Retirement should be a consideration, and some savings should be allocated toward retirement savings vehicles such as 401(k)s and IRAs.
If you plan on investing, you need to assess your risk tolerance. Suppose you are younger and have many working years remaining. In that case, typically, you have a higher risk tolerance because you have sufficient working years left to recoup any potential losses from bad investments. However, if you are older and closer to retirement, your risk tolerance would typically be lower as you have few working years left to recoup any losses.
Those with a higher risk tolerance would have more flexibility for investing in stocks, while those with a lower risk tolerance would lean more towards government-backed bonds.
If part of your financial planning includes investing some of your savings (and it likely should), determine how much you will allocate among the various categories such as stocks, bonds and cash, as well as potential newer digital investments such as cryptocurrencies and NFTs.
Consider a “Plan B” of what you will do if your investments don’t work out. Know what you will do if you wind up with less money for retirement than you had targeted in your goals. Write it down. Possibilities include: downsizing and moving to a cheaper home and location or taking out a reverse mortgage on your current home. It could also involve retiring at 70 rather than age 67 (or earlier). It may also entail working part-time in retirement. Know your options upfront, rather than being caught off guard at the last minute if your investments tank.