A financial plan is a great way to deal with the uncertainty of the market. Here is a guide that will help you stay on track with financial planning decade by decade.
We are worried about the stock market and the economy again, and we don’t know what the news will be tomorrow. And whether you’re in your 20s and just starting to pay attention or you’re in your 70s and feel like you’ve seen it all before, economic uncertainty can make you feel like you’re on a roller coaster. So it makes sense that I get questions from readers of all ages who aren’t sure how to deal.
Even though I can’t answer every question, I do have one strong suggestion for everyone: make a plan for your money and stick to it. This isn’t something hard to understand or mysterious. It’s not just for people who are older and have more money. A financial plan is basically a set of directions that will help you move forward no matter what happens to the economy.
Obviously, your plan will change as your life and goals do. But if you keep an eye on the big picture and follow certain signs at each stage of your life, you can take control of your money and worry less about the news.
Need to get back on track? Here are my suggestions—Financial Planning Decade by Decade:
In your 20s: Set your direction
Set yourself up for financial security and less worry in the future by learning how to handle your money well from the start. This is how:
Make a spending plan: Know how much money is coming in and watch how much you spend. Needs are more important than wants. Stay within your means, and maybe even below them.
Start saving: Your first savings goal should be to set up a fund for emergencies. Put it as a line item in your budget to make it easier to save. You should start saving for retirement in your 20s, along with an emergency fund. No, it’s not too early. Use a 401(k) or start an IRA and invest the money. Don’t just leave the money in the account. Once you’re on track for retirement, you can start saving and investing for other goals.
Build up good credit: Make smart use of credit cards. Avoid taking on too much debt, and do everything you can to pay off your balances in full every month.
Get a policy: Everyone needs health insurance. Depending on your situation, you may also need car insurance, renter’s insurance, or insurance for your home.
Start building in your 30s.
In the 30s, life often changes quickly because of work, family, and buying a home. And so should your financial planning. Here’s what to pay attention to:
Contribute as much as you can to a 401(k) or other plan offered by your employer, and make the most of any company match. Make sure that your emergency fund can pay for at least three to six months of bills. Save money to reach your other goals.
How to start investing: Invest your money in a diversified portfolio that fits your time frame and risk tolerance. No matter what the market does, keep your long-term goals in mind.
Make a plan: Have at least a simple will that names a guardian for children under 18 years old. If you do have children, you should start saving for their college now. Consider getting life insurance.
Step it up in your 40s
You’re probably getting close to your highest-paying years, so now is the time to save more and keep your lifestyle from getting out of hand. Make sure to do the following to protect what you have and plan for the future:
Make saving for retirement a priority by taking advantage of tax-advantaged accounts. Contribute the maximum to employer retirement plans, IRAs, and even Health Savings Accounts (HSAs) to get the tax benefit and to make sure you’re on track for retirement.
Make your insurance better: Consider adding umbrella and disability policies. You might also want to think about getting more life insurance as your income grows.
Bring your family along: Make sure you and your partner have the same financial goals and plans for the future. Get some money from the closet. Talk about money openly with your parents and your kids, depending on their ages.
Keep moving when you’re in your 50s.
Don’t stop now. Keep going in the direction you’ve chosen. But do look at where you are and add or change things to make your future more secure. The time has come to:
Plan for retirement: Start by taking a look at how much you’ve saved and how much you might have to spend. Set a date for when you want to stop working. If you’re behind, see how much more you can save and use catch-up contributions.
Look at your portfolio: Keep your portfolio diversified, rebalance it at least once a year, and make sure it fits how you feel about risk right now. Remember that you shouldn’t put money in the stock market that you’ll need in the next five to seven years.
Long-term care insurance should be looked into: Most of us don’t like to think about it, but now is the best time to think about long-term care insurance, since it usually gets more expensive as you age.
Make an estate plan or make it better: You may already have a will and/or a trust, but if you don’t, you should do something now. Make a “healthcare directive” as well.
Start to change in your 60s.
Now is the time to make important choices about how you’ll take care of your money when you retire. Don’t forget to:
Be specific: Think about how and when you want to stop working. How long will it really take? Will you stay in the same place or move? How much will it cost you? Make sure you agree with your partner.
Check out your options for Social Security and Medicare: These are important benefits that can make a big difference in how much money you have in retirement. Learn the rules and guidelines for timing so you can get the most out of both.
Make a paycheck for retirement: Add up the money you get from sources other than your portfolio, such as Social Security, a pension, real estate, etc. Then, figure out how much you’ll need to take out of your portfolio to pay your bills and decide how to do it. Aim to keep enough cash on hand to cover your expenses for one to two years so you don’t have to sell in a bad market.
If you are in your 70s or older: Change as needed, and have fun!
If you’ve stayed on track and stayed calm through the ups and downs of the economy, you deserve to enjoy what you’ve worked so hard to get. As you keep going:
Find a balance: There’s a good reason why a lot of older people stay active and work. Part-time work can be fun and help you make more money. Traveling, spending time with family, and doing things for yourself can also be satisfying. Find the right balance for your life and your finances.
Change your plan for getting money in retirement as needed: When you first retire, you may need more money, but as time goes on, you may need less. Keep track of your money and resources. Think about required minimum distributions (RMDs) and make sure to take them on time or you’ll be fined.
Change your plans for your will and for giving to charity: Make sure that your wills, trusts, and plans for giving to charity reflect your current wishes. Tell your family what you have planned so that there are no surprises.
A financial advisor can always help you make your plan better. But no matter where you are on your economic timeline, one thing is certain: life will change, and these uncertain times will change with it. No matter how old you are or how the economy is doing, having a financial plan will help you stay on track. These Financial Planning Decade by Decade can also help you to live life calmly.