Whether you’re planning for your retirement, saving for your child’s college education or dreaming of starting your own business, creating a financial plan is one of the most important steps you can take toward achieving your goals. Yet two-thirds of Americans report that they don't have such plans.1
“People spend more time planning for a vacation than for their financial future, which obviously lasts a lot longer,” says Sonya Britt, director of the Personal Financial Planning program at Kansas State University in Manhattan, Kansas.
A financial plan is a road map to help guide you toward your financial goals. Without one it's easy to veer off course and end up far from where you wanted to be.
Britt recommends that every financial plan include the following key components:
An emergency fund
This money provides a cushion to help protect you when the unexpected occurs, whether it’s a pricey car repair or losing your job. Most planners recommend saving the equivalent of three to six months of your basic living expenses. But even saving a month’s worth of expenses means you’ll have something to fall back on in an emergency.
Britt suggests first taking stock of your essential bills, including your mortgage or rent, utilities, groceries, and other necessities such as auto or medical insurance payments. Allocate enough money to cover those items, then plan to save toward your emergency fund and retirement. You can use any leftover money for discretionary spending (e.g., movies, shopping, etc.).
“Get in the habit of saving for retirement early,” says Britt, who recommends putting at least 10 percent of your income toward retirement. If your employer offers matching funds as part of its retirement plan, be sure to save enough to earn them. If your workplace doesn't offer a retirement savings plan, consider opening a tax-advantaged IRA. And if you can’t afford to save the full 10 percent today, start with what you can afford, and work up to 10 percent as your career progresses.
Your financial plan also should include a living will, which provides directions for your medical care should you become incapacitated; and a will, which spells out how you want your assets distributed after you die. “We don’t want to think about our own deaths,” Britt says. “But it’s important—especially if you have anyone who depends on you financially.”
1 "2012 Household Financial Planning Survey," Consumer Federation of America.
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