9 Steps to Build a Solid Financial Plan

April 3rd, 2020
April 3, 2020
Joseph Vecchio

Financial planning doesn’t have to be difficult. Yes, there is a lot of technical jargon and complicated things we do behind the scenes, but many of those things can be listed out in laymen terms. So, I thought it would be fun to list 9 things to do for an excellent financial plan, with or without a financial planner.

1) Track your cash flow and budget.
Why? You need to see the money coming in and the money going out. Tell your money where to go, if you don’t, your money will go to bad places (I am looking at your Starbucks, those “must-have” heels, and that “can’t miss” sporting event).

2) Pay your credit cards off in full each month.
Why? Even with the best credit score, your interest rate is probably north of 15%. Credit card swipes are painless, and it is easy to use them with no remorse. However, handing cash over has a different emotional connection. If you can’t pay your credit cards off each month, try using cash for a few months for discretionary spending.

3) Fund your emergency fund.
I can’t say it enough, the emergency fund is vital. It has to be listed in almost every blog post I write. Many get overwhelmed when they see these large goals over emergency funds, but you can start slowly. Start with a small goal of $1,000, with an auto-savings for $200 per paycheck and continue to grow your emergency fund.

4) Long-Term Disability Insurance.
Why? Long-term disability is meant to insure against an injury or illness which will keep you out of work for a long duration. This is completely different than a workers comp type issue, so don’t confuse the two and think you have coverage. Numerous studies show 1 out of 4 of us will face a long-term disability event, the top 4 claims musculoskeletal, cancer, injuries, and then cardiovascular.

Good tools: Your best place to start is with your employer, most employers will offer a group long-term disability option. Now, it may not be the world’s best coverage, but it is better than nothing. After that, get a few quotes for you via a private policy.

5) Term Life Insurance.
Why? If you are single and no one relies on your income or no one is responsible for your student loan debt (ex: Co-signor on student loans), then you may not need life insurance just yet. However, if you are young and healthy, it may still be a good idea to lock in a low-cost term policy. Just about everyone else should have some form of life insurance. Term life insurance is very inexpensive, and $1,000,000 – $2,000,000 is a good starting place for many.

Good tools: You probably have the option to add some group term insurance from your employer which is a good starting place. A group policy can be good for some and bad for others. If you have had some health issues in the past, your group plan could be much lower cost than a private plan. Why? Well, you are being “grouped” with other employees to spread out your risk. However, if you are healthy and can obtain a good health rating, a private policy may be lower cost.
Bottom Line: shop around, get a few quotes from private insurers, and review the cost of your group plan.

6) Maximize your employer retirement plan.
Why? Many employers offer a 401k, 403b, and/or some type of qualified plan. Take advantage of it! Hopefully, they offer a match of some sort, but even if they don’t, this is the easiest way to get started. If you are under the age of 50 this “bucket” allows you to save $19,500/year (2020), and if you are older than 50, you can save $26,000 (known as a catch-up of $6,500).

Don’t get overwhelmed with investment options, keep it simple and pick a target date fund that coincides with your estimated retirement year.

7) Maximize your other tax-advantaged savings plans.
Why? If the bucket above (employer retirement plan) is filled to the brim, then look to save another $6,000 or $7,000 if you are age 50+ (2020) into an IRA or Roth IRA.

Good tools: While the investing world can seem daunting, it is very easy in today’s world to set-up an account at places such as Fidelity, Vanguard, or TD and open an IRA/Roth IRA. Again, don’t get overwhelmed by the investment options. If you don’t want to put in the research to build a diversified portfolio, pick a target date fund that coincides with your estimated retirement year.

8) Save enough to taxable investment accounts to help accomplish other goals (ex: early retirement, vacation home, etc.).
Why? Truthfully, if you just filled the two buckets above, you would be way further than many of your peers. However, if your goal is financial independence, retire early (FIRE), then you will have to be more aggressive with your savings. Now, would be the time to open a taxable account for excess savings.

Good tools: The easiest way to do this, open a taxable account (individual or joint) at the same custodian as your IRA/Roth IRA. Most custodians have allocations tools you can use for suggested allocations, here is an example from Vanguard. So if you are sick of target date funds, this can show you an allocation suggestion based on your responses.

9) Debt Game Plan.
Hopefully, all your debt is paid down and/or a strategy is in place to pay it off (ex: student loans and public service loan forgiveness). If all the other items above are completed, start to pay down other debts more aggressively. Start with the highest interest rate first. Once all debt is paid off, start to pay more on your mortgage principal each month.

Financial Checkup with stethoscope wrapped around pink piggy bank

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