By: Eric Johnson
Most of us envision goal setting as a method of creating a roadmap for where we want to go. If you want to be a successful business owner, you will want to create actionable goals that allow you to succeed in your business. Over time, those goals will move you from an aspirational mindset to one of sustained success.
The same is true of our financial goals. You may aim to control living expenses to redirect a portion of your budget away from necessities to discretionary expenditures. Or you may want to live comfortably in retirement. Other financial goals include setting up an investment portfolio or minimizing taxes you owe to Uncle Sam. No matter the aspirational goal, it’s crucial to create realistic financial goals that create a roadmap to where you want to be.
Like any other goal, financial goals should be as specific as possible. Ambiguous goals are not very helpful for assessment purposes. Simply saying you want to save more next year is not an exact or actionable goal. Saying you want to save 5-10% of your bi-weekly paycheck is a specific goal that you can measure its successes (or failures) over time. Start by clearly explaining what you want to do and why developing financial goals that inform your overall financial planning regimen is crucial.
At the same time, developing realistic and attainable goals is equally important. Increasing your savings rate may not be possible in the short term. Perhaps you’ll need to analyze your budget to determine where to make cuts to redirect some of your income to savings. If you are naturally a spendthrift consumer, you may need to decide if a 5% savings rate is better than a 10% savings rate. Having a realistic mindset when creating financial goals helps avoid unnecessary frustration from your financial planning. Too often, many people give up on a goal because it is unrealistic.
If you have a partner, it may make sense to communicate why you are establishing a financial goal with them. Having buy-in from a partner provides support and accountability. Even when you don’t feel like saving money from your bi-weekly paycheck, an accountability partner can remind you why you created this goal and what you are striving for.
Assigning a priority and time range for financial goal setting is essential when developing a cohesive financial plan. Some short-term goals include waiting a day or two before making an impulse purchase. Other intermediate-term goals include increasing your savings rate to afford a vacation to the beach. Long-term goals may include retirement planning, paying a mortgage early, or saving for a child’s college education. Financial goals will evolve throughout your life as you age and enter new phases.
When establishing financial goals, remember to set realistic, feasible goals that can inform your financial planning process. Determine what matters the most to you and why you want to achieve that financial goal. Also, remember to draft specific financial goals; avoid vague statements as much as possible. Communicating with a partner bridges any divides the two may have on financial goals and can create an accountability partner when you fall short of your financial goal. Finally, assign a timeframe that makes sense for the financial goal.
Creating financial goals is not a work of fiction. They are a helpful first step when drafting a realistic financial plan. Financial planning without goals is a folly exercise that yields little to no benefit for the participant. Goals should inform your financial plan because they’re often a symbolic picture of where you want to be in the future. If you have financial goals, review them to see if they are realistic and specific. Did you assign a timeframe for them? If you don’t have financial goals, take some time this week to map out your future goals and how you want to achieve them.
Mr. Johnson is the Director of Financial Aid and an adjunct faculty member at Goldey-Beacom College.
Imagine you are in a relationship where neither partner communicates well. Over time, those misunderstandings can cause unhealthy relationship dynamics. To an outside observer, one would contend it’s a failed relationship with irreconcilable differences. Miscommunication can mar an otherwise happy relationship. It can also have deleterious impacts on the relationship’s ability to handle essential matters effectively.
Most of us are likely to have a healthy relationship with our partner. But what about financial matters? Think to yourself: when was the last time you and your significant other discussed financial issues?
According to a 2021 Couples & Money Study published by Fidelity, 71% of couples say they communicate effectively with each other on financial issues. 61% of respondents reported discussing some aspects of their finances monthly with their partner.
However, the study revealed that one in five couples identified money as the most significant challenge in the relationship. 44% of couples report arguing about finances at least occasionally. Couples also have difficulty with other topics like retirement, savings, and risk in financial decisions.
A couple that constantly bickers are unlikely to remain a couple for very long. Yet many couples are uncertain of their financial situation, which can strain a relationship. Financial compatibility is an essential concept for couples to understand. As discussed in last week’s blog post, money psychologically influences our decisions. Mooney is one of the more emotional issues in any relationship.
How difficult can it be to discuss money matters with your significant other? While avoiding discussions may seem like a more palpable choice, it does threaten the stability of a relationship. A destabilized relationship can cause other issues to arise, which may further erode the financial planning process for a couple. Establishing a healthy communication model when discussing money matters is essential to creating a robust financial plan.
Discussing money matters is not limited to the love of your life. It’s also crucial for children to discuss financial planning topics with aging parents. According to a 2022 Financial Planning & Preparedness of Americans with Parents Entering Retirement survey published by Wells Fargo, 46% of Americans have talked to their older parents about whether they have the money they need now. Just two in five respondents have discussed a financial plan for their parents’ future.
Interestingly, most Americans with older parents say their parents are prepared financially for their future and are transparent about where their money is. The study also revealed that children who discuss financial matters with their parents are more relieved than those who do not.
As parents age, many children must assume responsibility for caring for their parents. Understanding their financial situation (i.e., insurance policies, retirement accounts, bank accounts, etc.) can reduce stress when becoming a caretaker. Asking difficult questions can be a heart-wrenching experience. However, asking these questions today can provide greater clarity when an aging parent is no longer cognitively able to handle financial matters.
Again, this example shows the importance of communicating about money matters with those close to us—whether it’s a partner or parent. Resolving money disputes involves consistent communication about complex financial topics. While changing the behaviors of a spendthrift partner or one who prefers saving every penny is an unlikely task, you can work out differences between each other and create a cohesive financial style for both parties. Financial planning between partners can also reduce conflicts in a healthy relationship.
When making decisions in your personal life, how often do you reflect on your values? A person’s value system comprises ideals and beliefs guiding all life facets. A person’s value system influences their emotions and personality. And research has shown that it also exerts pressure on your decision-making with money.
In recent years, academic research has continued to show a link between money and the psychological components of our decision-making system. For example, an individual striving for an ideal work-life balance to handle family matters efficiently may prioritize careers with more consistent work hours and flextime arrangements. Although this individual could earn higher wages in a more demanding profession, the monetary gains do not outweigh the lifestyle costs.
Or you intentionally live a frugal lifestyle to put money towards savings or future expenses. Although your bi-weekly paychecks have wiggle room for discretionary activities, you may forego those expenses as they do not fit your lifestyle choices. Alternatively, you are the opposite, and you desire a consumption lifetime that prioritizes spending a significant amount of your income to afford indulgences or luxuries.
No necessary right or wrong approaches exist to the hypothetical examples outlined above. However, it is crucial to understand that we must align our financial decisions with our value system. Otherwise, we risk having lower personal satisfaction and a reduced quality of life that does not match our values.
Throughout history, money has been a significant motivator of our decisions because of its ability to exert enormous influence on our self-image. Our unique personalities and the composition of our emotional makeup can often dictate how we want to spend money. Emotional responses to money can be positive or negative. Think about your more recent paycheck deposit into your bank account. Did you have a sense of relief that you were finally able to pay bills? Or did you feel satisfaction that you now had additional funds to allocate towards savings?
A person’s attitude regarding money can fall into one of the following categories:
Some of us have a personality that heavily screams YOLO (literally and figuratively). Individuals with this personality type may feel it’s more important to live today to its fullest potential because tomorrow is not guaranteed. And while that sentiment is understandable, it does run the risk of saving for retirement or feeling consistently behind on financial obligations.
Ambition seekers are individuals who use money to create businesses, to better themselves through learning, or to follow a passion. Individuals with this type of personality may underestimate or miscalculate risks associated with their decisions. As a result, ambition seekers enjoy a desire to build an improved life while also sacrificing tomorrow’s savings.
Philanthropists derive pleasure from giving their time and financial resources to organizations or campaigns they are passionate about. Individuals with this personality trait may be willing to sacrifice earnings to volunteer with a charity that fulfills their passion. These individuals often feel it’s better to give than to receive. As a result, philanthropists may live below or ignore their own needs. This inaction can result in poor financial performance in the long run.
Some individuals are natural savers. Savers focus on carefully crafting a financial plan that permits them to live comfortably today while saving for the future. Examples of things a saver may set aside money for in the future include retirement, unexpected medical bills, vacations, or a new car. Savers are known for their ability to accumulate wealth over time. Individuals with this personality may save too much money and neglect current issues. In addition, savers can also put too much money into conservative investments that yield a lower return over the long run.
When developing a financial plan for your future, it’s critical to remember that your personality and emotions play a significant role in how you handle money. Think about how important money is to you daily. For example, can you live on a lower salary than your current one? Or would a higher salary generate more income to offset your expenses? What type of spending derives pleasure? Are you a risk seeker, or do you prefer to avoid risk? Do you need to accumulate a large amount of savings to retire comfortably in the future? Pondering these questions will help you make more informed decisions when creating a financial plan.
Economists refer to trade-offs as choosing one option while giving up another. Our personal value systems inform our trade-off decision-making. When deciding between present and future benefits, a person may use their personal value system to determine the best use of their money. When creating a financial plan, a person must be able to build one that accounts for the economic realities of their situation while also considering the psychological aspects of that person’s personality. Only considering your wants and needs in a financial plan is folly; realistically, a person must also consider their personality and emotions when creating a robust financial plan that adequately prepares them for today and tomorrow.
On the surface, the question, “What is money?” seems easy to answer. We use our wallets’ green dollar bills and coins to make purchases. At a deeper level, though, the question enters a more perplexing stage. Money can come in a variety of formats. For thousands of years, precious metals were a form of money. More recently, money has been in paper bills and tiny coins.
Further, money can also be digital in our mobile banking accounts. So, how do you define money? And what are the functions of money?
Money is a unit of exchange that economies use to measure value in financial transactions. Money has four economic functions:
Think about a dollar bill in your wallet. Does it pass the test as a form of money? Let’s review the four economic functions to see if it does. First, you can use the dollar bill as a medium of exchange. You will notice prices on the shelves at the grocery store. The prices you see are usually in the country’s currency. The currency is the U.S. dollar in the United States of America. Your dollar bill is a part of the U.S. currency and, therefore, a medium of exchange.
How would you value an apple? Do you need to compute complex calculations to derive how much it costs? Do you need to barter some of your items for the apple? Centuries ago, some countries used a barter system to acquire goods and services. The main issue with bartering is the inefficiencies it places on buyers and sellers. Buyers need to have enough items to make a trade. Sellers must also know their item’s worth and determine what they want in exchange.
As you can see, this process could be more efficient as both parties may make several counteroffers before reaching an agreement. With money, you can place a sticker on an apple that shows its price to potential buyers. Money enables a price system in a market economy. And everyone benefits as financial transactions are much smoother and more coordinated. Once again, your dollar bill is part of the U.S. currency system that serves as a measure of value.
Suppose I made a loan with you for your one-dollar bill. I promise to repay you next week with the entire principal amount and interest. Money also serves as a standard of deferred payments. In one week, you can expect full repayment of the loan’s principal amount and any interest you charged for the loan. Your dollar bill represents a standard of deferred payments.
So far, your dollar bill has met the first three functions of money. What about the last function? Is your dollar a bill a means of storing wealth? Suppose you have a few extra dollars lying around in your house and decide it’s better to open a savings account at your local bank where you can securely store the dollar bills while earning a little interest on it until you need the money again. As you can see, your dollar bills are also a means of storing wealth. When you put money in a savings or brokerage account, you earn interest (and perhaps appreciation), which helps you keep your wealth for future use.
When developing a financial plan, it is essential to remember the vital function money serves. Since money is a unit of exchange for purchases, knowing how much you need for a new car, house, or retirement is helpful when developing a financial goal. But does having more money make you happy? Well, that depends.
Let’s return to economics for a moment to discuss the concept of utility. The utility is an economic concept that refers to the benefit or value a consumer receives from a good or service. In practice, more is always better. You always prefer more items of good than just one good. And that makes sense at a superficial low level. However, does your utility value increase or decrease as you acquire more goods? The subsequent interest will still make you happy; however, you will be less comfortable than before. Thus, your marginal utility declines on each additional good. You are still pleased with the next acquisition—a little less happy than before. Marginal utility is always positive. The marginal utility will, though, grow smaller with each additional good.
Our society is built on the premise, “If I were just a millionaire, everything would be great!” Each additional dollar you receive may make you less happy than before. Your marginal utility falls with each extra dollar in your possession. So, while you are still satisfied with the million dollars in the bank account, the next million you receive will probably not make you as happy as the first million.
Utility is a subjective measure of a consumer’s happiness. You will not go to dinner with your significant other and say, “This steak delivered a utility value of 15 tonight.” If you do, please let me know your partner’s reaction. Money is a fascinating topic, and there are more layers to peel. Hopefully, you now understand the four basic tenets of money and why more money may not make you happier.
It’s late at night, and you are scrolling through one of your social media apps. Suddenly, you see an advertisement for a product on your mobile device, and you feel tempted to make a purchase. At first glance, you think, “I don’t need this!” Then, as time passes, you click on the advertisement and are now on the advertised product’s website. A shiny discount alert appears, and your temptation to purchase magnifies further. Suddenly, without any second thoughts, you add the product to the online shopping cart, import your credit card information into the billing field, and click submit. Are you happy with your purchase?
According to a study by Bankrate, nearly half of social media users in July 2022 made an impulse purchase of a product on a social media platform they use. 64% of those users later said they wished they did not make those purchases. As you can see, impulse buying is incredibly powerful when we are scrolling through social media on our couches. To many people, impulse buys are when you check out at a convenience store and see a discounted candy bar or product that’s cheap enough to make you want to purchase it. Social media makes impulse purchases even more tempting as it only takes one or two taps to make the purchase.
Credit card purchases are equally troublesome. Unlike a debit card, you can often spend more than you currently have in the bank with a credit card. You think to yourself at checkout, “I’ll just pay the balance off in a few weeks!” A few weeks pass, and your credit card balance grows more significant from new purchases. Suddenly, without warning, you have a ballooning credit card balance that makes it nearly impossible to pay off the debt.
As you can see from the two examples above, our behavior plays a role in our financial decisions. Impulse purchases or ill-thought credit card purchases can make you worse off. Understanding our emotions will help negate poor financial decisions. Psychology significantly influences our views on money, savings, and consumption. All our brains react differently to situations. That is a natural part of life. However, we all can take control of our lives and limit the damage negative behavior may have on financial affairs.
To become self-aware of your financial decisions, observe your impulse behavior decisions. Do you make impulse purchases when you are upset or sad? If so, channeling your emotions into a better avenue than consumerism may be best. Does your credit card balance continue to grow larger each month? Maybe it’s time to reduce consumption and put some of your income and savings toward your credit card balance. There are many ways to gauge your behavior to determine if your emotions are wreaking havoc on your financial affairs. You need to note what issues you are experiencing and take corrective action.
We are all imperfect with our financial decisions. Trust me; I have made plenty of ill-conceived financial choices. What is essential, though, is to learn from your mistakes and use those moments as a teaching opportunity. Remaining self-conscious about your financial decisions will help you when developing a financial plan.
Have you ever tried developing a financial planning process in your own life? You may have tried limiting your indulgences at the checkout counter in the supermarket. But at the end of the month, you discover you have yet to progress on your financial goals. Financial planning is for more than just the affluent members of society. Everyone needs to establish a financial planning process.
Personal financial planning is a strategy by which you plan for financial goals that are the most important to you. Your financial planning will evolve over your life. I often think back to the Chase credit card television commercial circa 2005 that highlights the progression of our lives. The commercial begins with a young college graduate receiving their diploma at commencement. The scene segues quickly into the graduate’s first job. A busy office setting emerges with the young graduate handing over reports to an older colleague. Once again, the scene transitions to a typical mid-twenty-year-old’s first date in a car overlooking a city. Shortly after that, we now see a mature man kissing his beautiful bride on their wedding day. The newly married couple enjoys a wonderful honeymoon and will soon have children. At the end of the video, we see the man flipping through wallet-sized photos in his wallet and carefully placing his AARP card into a credit card slot. The melancholy music slowly concludes, and we see a much older man fishing with his grandchildren.
The reason I point this commercial out is that we often mistake financial planning for the ultra-wealthy or those who are nearing retirement. Financial planning begins at a young age and never truly ends. Our financial plans will change over our lives as we complete our college studies, find a significant other, start a family, and climb the corporate ladder. In addition, a sound financial plan will weather any storm in life.
Developing a sound financial plan is a six-step process. First, you need to define what your financial goals are. My financial goals differ from yours. And that is okay. We are all different and have different needs and wants in our lives. Second, develop a financial plan that is relatable to you and incorporate strategies that make sense for your current financial situation. Third, implement your plan into your daily activities. This step is crucial to achieving your financial plan’s goals. Fourth, use budgets to monitor your spending habits. Using budgets will also help you determine when you will reach a financial goal and when you can reallocate your savings to new goals. Fifth, correct yourself when mistakes occur. None of us are perfect; we are all bound to make a financial mistake here or there. Noticing those mistakes before they become giant snowballs is critical to staying on course with a financial plan. Finally, continually reassess your financial plan as life circumstances change. Like the man in the Chase credit card television commercial, our lives are not linear and are often unpredictable. Reassessing financial plans and utilizing new strategies as we grow older will help you achieve your financial goals.
Start incorporating the six steps outlined above into your life. A personal financial planning process is for all of us—from the newly minted high school graduate to the aging senior citizen. Don’t delay your financial planning any further.
When we decide to use a portion of our disposable income for everyday living expenses, we do so to fulfill a need. Likewise, when we use an amount of our disposable income for luxury goods, we do so on items that can become future assets. Economists define assets as items that can provide economic benefit to an owner. Assets can be tangible or intangible. Examples of tangible assets include cars, homes, and antique items. Intangible assets include human capital (education, training, or skills), patents and trademarks. Stocks and bonds are financial assets that many people use to build wealth.
Financial assets are intangible assets. When you purchase an index fund or individual equities and bonds, you buy an asset with a current value. For all assets, the asset’s future value can fluctuate over time. Many people hold financial assets as part of their asset portfolio to earn a rate of return in the future. Similarly, tangible assets also fluctuate in value over time. Real estate values can differ over long periods. Many individuals build wealth through their home equity.
Simply put, wealth is the total net value of all the individual’s assets. The more assets you own, the more likely you will have a higher net worth. Some people purchase assets for consumption. For example, you may buy a lovely home or a high-quality automobile that is comfortable to drive. Or, you may have assets for investment, such as rental properties that generate income or brokerage accounts that build wealth. The bottom line is this: accumulating assets aims to build your wealth while maintaining your current consumption patterns that provide you with an adequate standard of living. Failure to build wealth during your working years may set you back in retirement.
Take some time this week to review your current net worth. What assets do you own? What assets would you like to own? After pondering those questions, incorporate those thoughts into your financial plan as goals. Set attainable milestones that you can reach over time when acquiring assets. Acquiring an investment takes time to happen. With careful planning, you can add productive assets to your portfolio that will generate long-lasting wealth.
When developing a financial plan, you face a trade-off with your disposable income each pay period. Disposable income is the income that remains after deducting payroll taxes and other mandatory payments each pay cycle. Our disposable income faces a unique trade-off: how much money to spend today versus how much to save for tomorrow. On the surface, that is a simple proposition. “Of course, we should save as much money as possible for tomorrow!” It is a more challenging decision than we will admit on the subsurface.
This trade-off depends on two factors: current needs and future needs. Let’s start with everyday needs. Your current spending level largely depends on the necessities of life and your average propensity to consume. Economists define the average propensity to consume as the proportion of annual income spent on consumption. All of us must purchase necessities. If you do not believe me, try going a month without food, utilities, medicine, or clothing. Very quickly, you will realize necessities are goods we must purchase. Our income levels will determine our budget’s spending percentages on necessities and luxury goods. Individuals with low or modest incomes have more significant consumption propensities than wealthier individuals. This reality is because low-income consumers spend more of their budgets on necessities than more affluent consumers. Thus, as your income increases, necessities become a smaller portion of your budget, and you can devote more money towards savings or luxury goods.
However, two individuals on different spectrums of the income scale can have a similar average propensity to consume. Wealthier people may feel purchasing more luxury goods or higher-quality necessities is necessary. A poorer person may face budget constraints that cause them to have a more significant average propensity to consume because essentials make up a considerable portion of their budget. While an increase in wealth theoretically decreases an individual’s propensity to consume, it does not always happen.
Now, let’s shift gears and talk about future needs. Future needs will vary for all of us. At a basic level, though, examples of future needs we are all likely to experience include:
As you can see, a comprehensive list of future needs can quickly evolve into many topics. What is essential to understand is that every dollar we spend today on goods and services is one less dollar available in the future for our retirement nest egg, car repairs, or dream vacation. While maintaining a high standard of living today makes us happy, it will only deprive our future selves when we try to replicate our standard of living in retirement. Therefore, a carefully crafted financial plan sets aside some of our disposable income today and places it in investment vehicles that generate income, such as interest. Alternatively, some investment vehicles allow you to build your savings through savings and an increase in the asset’s valuation. Generating a return on your savings helps you grow your nest egg and combats the effects of inflation. Remember the critical rule of finance: a dollar today is worth more than tomorrow. Inflation erodes your dollar’s future worth. Your rate of return on your savings helps you ward off the impact of inflation and maintains your current standard of living when your income level falls.
Recognizing your current and future needs will help you develop healthy spending habits. While it is tempting to splurge each pay period, it is essential to remember that every dollar you spend today is one less dollar you have available in the future. Occasionally, splurging is an excellent way to reward yourself for hard work or accomplishments. However, do not let splurging on luxury items outside your means become a daily facet of life. Avoiding the temptation of overindulging on your current needs will help you direct some of your disposable income to savings or retirement accounts. Review your budget to determine your necessities in the coming month. Then, eliminate some of the luxury goods you prefer to indulge in each month but could go without occasionally. You will soon discover you have more disposable income than you realize. Redirect those cost savings to your investment vehicles as often as possible. Over time, you will build a sizeable savings account that can weather future predicaments that life may toss.
In our daily lives, we all make purchase decisions. Some items are necessities that we all need to sustain our daily lives. Necessities include food, utilities, housing, transportation, medicine, and health care services. Each of those examples is something we are unlikely to give up—even if our incomes change. If we face a tradeoff, we may reduce our consumption of each item or substitute a good for an inexpensive one. However, all of us are likely to purchase groceries, pay our electric and water bills, and make our monthly rent or mortgage payments.
Other items are what economists may consider luxury goods. Luxury goods are items we all enjoy having but are not necessary to sustain our daily lives. Luxury goods include jewelry, expensive sports cars, liquor, and high-end televisions. While we may try to justify each of these items in our consumption patterns, it is more likely than not that we do not need these items to live a fulfilling life. Most of us prefer a sports car for our transportation needs; however, a lower-priced and reliable mid-size car fits our budget constraints more neatly than an expensive automobile.
You may be wondering how necessities and luxury goods relate to standard of living. Our standard of living determines the types of goods we can purchase. Economists define the standard of living as the quantity and quality of goods and services available to a population. As an economy grows and expands, consumers’ incomes generally rise, and they can purchase higher-quality goods and services. In addition, consumers generally prefer to increase their purchases of luxury goods as their standard of living grows. When an economy slows and contracts, consumers’ incomes stagnate or fall and tend to decrease consumption. Thus, a person’s standard of living can quickly depend on the state of the economy when they do not have a sound financial plan.
Our quality of life and perceptions of wealth largely depend on our standard of living. Some external factors impact our standard of living. Factors that may enhance or impede our standard of living include geography, public services, inflation, pollution, and population density. These external factors may affect our quality of life and, in turn, may help or hurt our ability to generate wealth. For some of us, increasing our standard of living means higher quality cars, a lovely suburban house, and the ability to travel. For others, an increase in our standard of living means a large retirement nest egg. Whatever your desires are, it is essential to remember that our standard of living will dictate our consumption and saving patterns.
Sound financial planning allows you to minimize expenses, increase savings, and prepare for future goals. Therefore, when developing and following a sound financial plan, you also contribute to your living standard. While your standard of living may have constraints due to external factors beyond your control, you can build a plan that withstands those forces to build wealth. As your wealth increases, so will your standard of living. Creating a sound financial plan increases your standard of living while also preparing you for tomorrow’s emergencies. Hopefully, this topic motivates you to take control of your financial decisions to better your future self. Trust me—your future self will thank you again and again.
At a young age, it is often hard to conceive what retirement or old age will look like. It’s not hard to understand why that topic is mystifying to many individuals. The future is inherently uncertain. Even with the best forecasts, it is hard to project what tomorrow will bring. Neuroscience can explain the dilemma our brains have with the concept of uncertainty. According to a ScienceDirect journal publication, researchers Achim Peters, Bruce S. McEwen, and Karl Friston (2017) confirmed an inkling many of us infer daily: our brains dislike uncertainty. Uncertainty requires more power from our brains, reducing our cognitive capabilities to the point of poor decision-making and an inability to learn effectively.
When you reflect on the future, you may ponder what “the good life” means to you. For some of us, it may mean the ability to have financial freedom to pursue our personal or professional goals. For others, it may mean owning a lovely home, becoming an entrepreneur, or living with minimal debt. Whatever your ideal scenario is, it is essential to remember that all our goals start with a robust financial plan. A solid financial plan will weather the various storms of life: economic cycles, political shifts, and technological advancements. Recent economic downturns in 2007-2008 and the COVID-19 pandemic highlight the growing importance of a durable financial plan.
Personal financial planning will help you define personal financial goals and strategies for reaching those goals. One day, our ability to work will diminish; having a financial plan that is flexible enough to withstand employment changes will provide you with peace of mind as you pivot from working to retirement. In addition to end-of-career flexibility, sound financial planning will increase your standard of living, develop healthy spending patterns, and provide you with an avenue for building wealth. You will need more than financial planning to guarantee your success in the future. However, it will help you analyze trade-offs in consuming income today and setting a portion aside for tomorrow. You never know when you will face an unexpected illness, job loss, or personal emergency that may necessitate the use of savings. A financial plan will prepare you for whatever life throws at you.
When developing a sound financial plan, remember the SMART acronym:
Assign yourself specific goals that make sense for your future. Make sure your goals are also measurable. For example, how much money do you wish to have in retirement? Also, ask yourself if your goals are attainable. While it is essential to set high goals, you may need to set achievable goals to overcome budget constraints. Setting unrealistic goals will hinder your success with financial planning. Always set realistic goals and readjust your goals as your income grows. Finally, select a target date for each plan. Determine what age you would like to retire by, when you would like to pay off large debts, and any other goals that may intrigue you. Personal financial planning comes down to you hence why it is personal financial planning.
The rewards of sound financial planning are many. Likewise, the pitfalls of poor financial planning are equally many. Analyzing the trade-offs of consumption today versus tomorrow’s savings is an important one we all must make. Whatever you decide to do, remember that sound financial planning will put you on a better path than someone who makes no plan.
Sources
Achim Peters, Bruce S. McEwen, Karl Friston,
Uncertainty and stress: Why it causes diseases and how it is mastered by the brain,
Progress in Neurobiology,
Volume 156,
2017,
Pages 164-188,
ISSN 0301-0082,
https://doi.org/10.1016/j.pneurobio.2017.05.004.
(https://www.sciencedirect.com/science/article/pii/S0301008217300369)
Ready to begin your journey?
Complete a free application today.
Goldey-Beacom College is a Equal Opportunity Employer/Program. Auxiliary aids and services are available upon request to individuals with disabilities.
Text Telephone/Teletypewriter (TTY) Relay Service: 711 or 800-232-5460 for English or 877-335-7595 for Spanish
