Financial planning means something different to everyone. For some, it’s about getting by month to month on their paycheck, for others it’s about watching how their stock portfolio performs each day.
Unfortunately, few of us feel completely prepared to meet our ongoing financial obligations and objectives. Worries about money have become one of the greatest anxieties of our day – witness the dramatic rise in financial-related publications, radio and television shows, and websites.
Because each person’s situation, lifestyle, and goals are so different, there is no single turnkey solution for successful money management. However, we can identify several steps that successful people take in pursuing their financial goals. We call these steps “Life Cycle Planning” because each step can be tied to the attainment of certain life-defining events that almost everyone goes through.
Development of Human Capital
Human capital refers a person’s ability to turn their skills and abilities into a livelihood. The development of these skills and abilities helps us maximize our income potential in a competitive marketplace.
In our early years, usually between age 18 and 25, we set ourselves on a course that largely defines our human capital potential. Each of us makes an investment in human capital, whether we realize it or not. For some this is an investment of time, gaining experience and skills on the job. For others it is an investment in trade school or college.
It should also be noted that, although our greatest focus on human capital development generally takes place in our early years, this is an investment we should continue to make and assess throughout our working careers. Your ability to earn income, now and in the future, is the most valuable asset you own.
Expense Management and Budgeting
Once your “human capital” investment begins to pay dividends in the way of regular income, you must begin to develop and apply management skills to your newfound earnings.
Without managing your expenses, your wants and needs will invariably outpace your ability to earn. By implementing some form of budgeting, you can begin to set your sights on saving and meeting your longer-term financial objectives.
A beginning budget can be as simple as setting aside a predetermined percentage of your earnings each month for saving, spending what is left until it is gone, then spending nothing more until next month. A more sophisticated budget takes into account irregular and flexible expenses, emergency expenditures, establishment of a “rainy day” fund, as well as saving and investing.
Ensuring Adequate Liquidity
As your budget begins to pay off in a healthy savings account, you might begin to wonder how best to apply your limited savings to your unlimited needs and wants.
Without exception, the first financial need you should meet is to have an emergency fund. An emergency fund allows us to cover unexpected short-term needs using cash instead of leveraging your future earnings through costly loans. As a general rule of thumb, your emergency fund should be adequate to maintain your standard of living for six months.
Ample Insurance Protection
A major disability, the loss of a family breadwinner, a fire in your home, a family member’s major medical problem or need for skilled nursing care … the most dramatic emergencies can seldom be paid for completely using personal savings.
Although such tragedies can create devastating individual financial hardship, the financial risk of such events can be shared by very large groups of families and individuals through insurance.
Life insurance, disability income insurance, property and casualty (P&C) insurance, long-term-care insurance, and major medical insurance all have a place in your “Life Cycle Planning.”
Long-Term Funding Objectives
Once you’ve accumulated sufficient funds to cover your emergency needs and purchased protection against financial risks, you can begin saving for your long-term goals in earnest. We can help you design a plan to pursue your retirement objectives that fits with your personal financial goals, risk tolerance, and time horizon.