Financial planning is one of the essential parts of making sure your life is alleviated by stress. Keeping your hard-earned and invested money safe and always growing is key to your security during the later years in life. There are several things every investor should do in the building, reviewing, and adjusting their financial plans over their lifetimes. Breaking it down by chunks of time helps to lessen the overwhelming task of planning so many years. Remember that all arrangements should be made with an understanding that there will likely be unexpected situations during your life that have the potential to force a pivot in your financial planning.
With that understanding, you will be ready to shift funds or switch up strategy without haste or fear of derailing your carefully laid plans. Here are a few things you should do in making five-year financial plans – let’s get started!
Your five-year financial plan will change as you age.
One approach to adjusting your investment portfolio’s holdings is known as “The 100 Rule“. Easy to follow and implement but may sound too extreme if you are young and just starting; however, you will never regret forgoing a little luxury in your youth for financial security later in life. Here’s how to ballpark your target stock allocation with this handy trick.
All you have to do is subtract your age from 100. For example, assume you’re 25, just landed a good job, and are looking to begin holding back money to build your nest egg. You would subtract 25 from 100, leaving you with the number 75. According to the rule, this means that you should invest 75% of your savings in stocks.
When you’re younger, you’re able to overcome financial market downturns such as recessions or poor financial instrument management moves much more reliably than when you’re older. Stocks are riskier – this also means that they’re able to bring you higher returns – than forms of investments like treasury bills, bonds, money like market funds, and certificates of deposit.
Now, assume three decades have passed, and now you are 55. Applying the rule, we see that 100 minus 55 is 45. That means that in this older age bracket, you should stow away 45% of your savings in stocks. This strategy is, of course, not a science, and is best practice to avoid adjusting your percentage of stock contributions too often to prevent recurring trading fees. But the notion of the ratio of stocks should change over time is suitable for thought.
Further, the active management of investments is a bad idea because studies have consistently shown that investors are likely to make bad decisions based on a few dozen cognitive biases and logical fallacies.
You should also know about target-date funds. Also known as TDFs, target-date funds are ideal for 401(k) accounts. Set up your 401(k) account with a TDF, and it will modify its investment portfolio based on how old you are, when you plan on retiring, and current market trends to protect against potential vulnerabilities on a predictive, preventative basis.
What’s up with your debt situation?
Long before you think about pouring your savings into investments, it may be wise first to pay off your debts. Consumer debt, including student loans, car loans, and personal loans, can add up over time if not managed carefully. Keeping other debts low will enable you to save more in your financial plan. Credit cards and loans with high-interest rates should be paid off as soon as possible. With the help of sites like Purefy, you can compare repayment interest rates and reduce student loan payments if necessary. Mortgages are generally the exception since most of the population is unable to buy a home with cash.
In addition to your five-year financial plan’s management, you should also plan out how much debt you’re able to pay off, as well as what kinds of debt will be paid off first, in a similar line of thinking such as a five-year debt payment schedule.
You should save for a separate emergency fund, ideally up to a few thousand dollars, to be used for keeping you above water in the event of a financial emergency. While paying off debt is important, you don’t want to be stuck in the case of an unexpected financial crisis. When you do not have the savings on hand to cover the unexpected cost outright. Click to learn more.
Fortunately, even if you’ve failed to do this, all hope isn’t lost for your financial welfare. In the event of an emergency, such as an unexpected hospital visit, you can search for short-term solutions like that may help you cover the surprise expenses. These loans should only be leveraged when you do not have the savings on hand to cover the unexpected cost outright.
While the thought of putting your hard-earned cash toward responsibly paying down your debt can seem stressful, you’ll end up patting yourself on the back in the future. Trust me!
Understanding the five-year financial plan
These tips are a great place to start understanding best practices for five-year financial plans. However, the money market and economic systems are ever-changing, and you should also consider reaching out to one or more professional financial advisors to make better sense of your lifelong financial plans. Staying updated about local and global economic news is also essential, as well as absorbing as much information from experts as possible.
A few of them you could follow are:
- Dave Ramsey
- Suze Orman
- Podcast: Planet Money (NPR)
- Podcast: Investing Sense
Making the plan is essential, but it is only the first step. More complicated things will happen along, and you need to be prepared to make adjustments on the fly. Be willing to go without, don’t fall for expensive fads, and overpriced cars and luxury apartments to ‘look the part.’ Be prideful of your frugality, and always keep in mind what it is that you’re buying – a fantastic future! If you keep your head in the game and stay vigilant in reminding yourself of the rewards to come, like buying a house or early retirement, you will find success. Only in your diligent involvement and obsession with your financial journey will you take full ownership of your very bright future.