You probably have a pretty good idea of where your paycheck goes — your housing and transportation, your groceries, household expenses, healthcare and maybe some savings. What you may be less clear on is the “big picture” of your finances, and how your choices are helping — or hurting — your personal and financial goals. That’s why it’s so important to have a sound financial strategy.
A Roadmap for Your Future ( and Present)
A financial strategy is different from a budget or a savings plan (although these definitely play a role in your strategy). It’s a way to make sure that you’re managing your finances to fit your values and priorities. A sound financial strategy can help you achieve things that are important to you, like paying for your kids’ education or buying your own home. It can also help you ensure that your family is prepared for the unexpected, like a serious illness, the loss of a job or the death of a family member. Planning for retirement is another important part of a financial strategy.
By taking the time to lay out a sound strategy now, you’ll be able to see where you need to make changes in the way you spend, save or invest, and identify gaps in your current or future cash flow needs.
Step One: Take Stock
To get started, take a step back and look at your current financial picture. This will give you a sense of what is and isn’t realistic in terms of how you spend and save, and whether you need to make changes.
Start by tallying your income and expenses. This includes your fixed expenses (things that don’t change month to month, like rent or mortgage, tuition bills, healthcare or other insurance premiums, or debts like car payments) and variable expenses (utility bills, household expenses, clothing, etc.). Be sure you know your net worth, too. This is the total value of all of your assets, including savings, investments (retirement and non-retirement) and real estate.
Step Two: Define and Prioritize
Next, you’ll need to define what your goals are, and think about which ones are most important to you. What matters most to you in life? What makes you feel secure and content? What do you want to provide for the people you love? As you develop your financial strategy, be sure to consider each of these key areas:
- Saving for major expenses: Do you hope to fund some or all of your children’s education, buy a home, or save up for other big-ticket purchases like a new car or major trip?
- Managing risk: Do you have enough savings to cover your expenses if you lost your job or faced a large, unexpected expense? In the event of your death, would your surviving family members have adequate financial resources? Do you have disability insurance, in case you were ever unable to work?
- Paying down debt: Do you have credit card debt, car payments or other debts you want to pay down?
- Planning for retirement: How much income will you need to cover your expenses when you retire? If you’re nearing retirement, are you ready to make the change from getting a paycheck to drawing on your savings?
- Planning your estate: Do you have a will and/or trust set up to ensure that your assets will be distributed the way you want after your death? Have you taken steps to minimize the estate taxes your family would have to pay?
- Minimizing taxes: Are you taking steps to minimize your tax burden, like using investment products with tax benefits?
Step Three: Create a Plan of Action
Once you’ve prioritized your financial and personal goals, it’s time to take action. Think about which and what portion of your income and assets you could use to meet your goals, both now and in the future. Could you put part of your paycheck into an education or retirement savings account every month? Is there a way you could trim your expenses to pay down consumer debt?
You’ll also want to consider which financial products — insurance, investments, real estate, etc. — might play a role in your strategy. This is where working with a Financial Professional can be a big help. He or she can help explain your options, and also work with you to create a roadmap to help you reach your goals.
And remember: developing a financial strategy isn’t a one-time event. When your life changes, whether expectedly and unexpectedly, your financial plans may need to change, too. So be sure to review your strategy periodically, and make adjustments as needed.
The Biggest Benefit: Peace of Mind
Not only does a sound financial strategy help you achieve your personal and financial goals; it can help you sleep better at night, knowing that you’re doing everything you can to plan for the future, prepare for the unexpected, and provide for the people who matter most to you.