What Are Your Dreams?
Your money comes down to dreams. What do you dream of right now? What do you dream of having or doing in five years, ten years or twenty years? Your dreams can be applied to the creation of your goals, but this is where many people fall short. If you focus on your goals and are clear about what you want and how you are going to go about getting it, you can be very successful. However, there is a long path between wanting something major and actually possessing it.
Many people desire to go to school so that they can accomplish a major milestone. If getting your bachelor’s degree or an advanced degree is something you consider important, you need to plan for this. Without a plan you may end up making many mistakes that cost you time, money and a lot of stress that you don’t need. Many students rack up massive student loans that literally take decades to pay off.
Some other students use alternative means of acquiring and using funds and garner far smaller debts. In the case of educating your children, you may also find that starting when they are very young and planning far in advance is the least stressful and most effective path. This is also a great example to set for your children about all kinds of goals.
Home ownership is a very powerful dream. While there is definitely an emotional element to owning your own home, this requires a great deal of planning to pull off effectively. Your home is a large investment, and its maintenance can become a lifelong commitment if you own the home long term. The process of raising a down payment and saving for inevitable maintenance costs is a major component of preparing to become a homeowner, and a part you would be wise to plan carefully.
Retirement is perhaps the ultimate goal of most people. Having a life where you can live entirely off of the money you have earned in the past while enjoying the luxuries and experiences you may not have had time for during your career is something a lot of people want. But, without a plan, the dream of retiring and living life on your own terms can become a nightmare of regrets. With a properly formed plan, however, this is a dream that can become a solid and actionable series of goals.
What Are Your Needs?
There is no way to escape all expenses. Every month, you will have to spend money on certain things. While a lot of the finance tips are concerned with helping you to minimize your expenses, many people have never even put much thought into what they actually spend each month. This comes down to short-term needs, bills that must be paid on a monthly basis and contributing savings toward medium- or long-term expenses. The following are a few examples of each of these types of expenses.
Short-term needs are the incidental things that you and your family require. A few common examples are food, gas for your vehicles, school supplies, clothes for work and school and your morning cup of coffee. On their own, most of these needs are small, but taken as a group they can rapidly stack up into being a large bill.
Many people never consider some of these needs to be regular parts of their budget, so the money they spend on gas, clothes, food, etc. seems to just disappear every month. However, you need to account for these expenses and understand what you spend and why if you are to take control of your finances. In some cases, bringing these expenses under control is a powerful step toward realizing your financial goals. In other cases, these expenses can be left as they are while you focus on other expenses.
Monthly bills ultimately come down to the maintenance of what you have. You may have financed your education with a student loan that must be paid each month. Your rent or mortgage is an expense that is generally paid on a monthly basis.
Your utilities such as water, electricity, heat and the Internet need to be paid as well, or they will quickly be shut off. Any loan payments and insurance payments for your car are also monthly requirements.
As a general rule, making a noticeable impact in your monthly bills takes a change of lifestyle or habit, so they are often the last expenses to focus on once your other expenses are settled. In some cases, however, the formation and use of a plan that lowers your monthly expenses can be easy and effective. Such a a plan can include adding insulation to your home to reduce your heating costs or installing more energy efficient appliances; it could even mean buying a used car that has lower insurance and fuel costs as well as a lower monthly payment than a more expensive vehicle. In some cases, even taking more extreme measures, such as going from a two-car household to a single-vehicle household, can be a reasonable plan.
Beyond monthly bills and expenses related to maintaining what you have, there are also goal-setting and goal-realizing expenses. For example, contributing a set amount to your 401k and an amount to your savings account to build your emergency fund each month are not strictly required but are definitely good ideas. Also, there are efficiencies you can set up such as paying your property taxes, and property and casualty insurance, on an annual rather than monthly basis.
Many insurance companies allow you a discount when you pay annually, and you can earn some interest on the money you “self escrow” between annual payments. You can set up a savings account specifically for 1/12 of these annual amounts and have the money automatically moved to such accounts each month in order to save money versus paying your insurance and other such bills through an escrow company.
The above are merely examples. Your needs are as individual as your home or your fingerprints.
What Could Go Wrong?
Planning for the future involves taking the mature stance that sometimes problems are going to arise. Sooner or later, something is going to go wrong and being ready for it is the best course to take. When you forget that times can get difficult, they tend to do so more often and in more insidious ways. Often, the early stages of a person’s life are spent living moment-to-moment and simply reacting to problems as they arise. However, when you start to plan, you realize that you can get ahead of many kinds of problems. Preparation can be unpleasant at first, but in time it becomes extremely reassuring. It is impossible to predict or even list everything that could go wrong. Let’s consider a few common kinds of problems that can be addressed by financial planning:
Market prices can change suddenly. Oil prices have jumped 50% inside of six months and they have fallen 60% in six months, too.
During this time you would have experienced excessive risk from bets on fuel prices (oil companies, commodity funds) or bets against oil (airlines). Planning your investments can help reduce your dependence on these changes.
Interest rates can change suddenly. If you have a balloon payment or an adjustable rate mortgage when interest rates spike you will have to pay more than if you lock in interest rates at affordable, fixed rates.
Sooner or later you will get sick. You may get injured. While having hearty constitutions and keeping yourself in good shape can help to stave off these problems, accidents happen and problems can develop that have no easily explained cause.
You could have an interruption in your work. There are many terms for this: you could be laid off, fired, furloughed, or put on hold. Financially, they all mean that your employment income is cut. Now is the time to begin saving an emergency fund for this, the most basic of emergency types.
When you start to plan, you would be wise to begin with an understanding that your ability to work is one of your greatest assets.
At some point, nearly everything you own will either need to be repaired or replaced. Your car will need maintenance, new oil, new tires and other new components. If you own your home or will at some point, you will eventually have to either repair or replace innumerable parts of the house. Your financial plan needs to account for these future necessities, because ignoring them will cause them to build up until they can no longer be ignored.
A family member will die or become infirm. You may be tasked with providing care to this person, as well as dealing with their final needs or even executing their will. This may require taking a leave of absence from work, it could involve traveling and may even involve the expenses associated with selling and/or donating their possessions.
You may even have to pay for your loved one’s health care expenses. While these are daunting to
consider, not considering and planning for them will make them worse down the road.
A divorce from your spouse can take its toll. Living apart will be more expensive than living together, and dividing your assets may require the forced sale of a house or other non-tradeable assets.
You or one of your children could find out they are having an unplanned baby. Congratulations! Paying for your child will be expensive.
Financial planning can make these difficult situations more bearable. Pretending that these possibilities could never happen to you or your loved ones is very, very dangerous.
