Help Create "Good Fortune"
Thomas Edison said, “Good fortune is what happens when opportunity meets planning.” That’s what financial planning is all about: helping create “good fortune” through a plan that makes sense instead of relying on luck to afford future luxuries. To alleviate economic worries, plan for your future, including bumps in the road.
Plan for the Unknown
First, plan for the unknown: unexpected bills, natural disasters, illness, job loss, salary cuts, nursing home expenses. Put at least three to six months of expenses in a money market or short-term savings (such as a certificate of deposit) for emergencies. If your family has a single or variable income, you should save more.
Wants and Needs
Once you have established your emergency fund, set “wants and needs” priorities into short-, medium- and long-term savings buckets. If you plan to take a vacation or buy a car soon, having a short-term bucket of money will help you achieve that goal.
If you’re saving for a bigger item such as a house down payment, college education or wedding, set up medium-term savings. Consider money market funds, certificates of deposit, or short-term bonds. If you are saving toward your child’s or grandchild’s college education, consider investing those dollars in a 529 plan.
For most, a comfortable retirement is the most important long-term savings goal. Unlike your emergency, short- and medium-term buckets, your retirement account is the one bucket where you have time to ride out market ups and downs. It’s easiest to save for retirement through your employer’s retirement plan and IRAs. You then may have the option, based on your risk tolerance and time until retirement, to invest in mutual funds consisting of stocks, bonds and cash.
When you start to distribute money to provide retirement income, you will need to find an appropriate balance between preserving the principal and maintaining growth to keep pace with inflation.
Start with the basics: think in terms of short-, medium- and long-term goals, then use your new “savings buckets” as the foundation that will provide safe cash for your living expenses and growth in your long-term investments. Financial planning will bring you financial peace of mind.