Long-Term Financial Plan
The French writer and poet Antoine Marie Jean-Baptiste Roger said, “A goal without a plan is a wish.” Aside from not knowing who that guy is, he had a point. Without a plan for achieving your goals, you’ll only accomplish them through pure luck if you accomplish them at all.
Have you ever experienced running late for your own party? Your place needed to be cleaned, food prepared, you still had to get wine and get yourself dressed before guests arrived. If you’re like us, you pulled out your phone and made a list of the most logical, efficient order of tasks to prepare. You may have swapped out complex dishes for easier ones, foregone a thorough house cleaning for a topical one and thrown your hair in a ponytail. We don’t throw our hair up in pony tails.
You planned. Without a plan, there was a chance you wouldn’t be ready. The same applies to your financial life.
We’ve broken financial planning into three buckets. They’re daily financial plans that are achieved day-to-day, short-term financial plans that are achieved within three to five years and long-term financial plans that take five or more years to achieve. The daily financial plan supports the short-term financial plan that supports the long-term financial plan.
An analogy for creating a financial plan is that of the jar with rocks, pebbles, and sand. If you fill a jar with sand, you won’t be able to add pebbles and rocks. If you do the opposite and fill the jar with rocks, then pebbles and then sand, you’ll be able to get all three in the jar. The rocks represent your big financial goals such as being prepared for retirement. The pebbles represent smaller financial goals such as maxing out annual retirement contributions. The sand represents day-to-day expenses.
If you only focus on the sand, the weekend shopping and dinners out, you won’t have enough money each year to prepare you for the larger financial goals. Then, that fabulous vacation was nothing but a wish. Sadly, a mai tai on the sofa is not as good as a mai tai on the beach.
Below are six steps to creating a long-term financial plan.
1) Determine your one to three most important financial S.M.A.R.T. goals
The first step in creating a long-term financial plan is deciding what you want. Where do you want to go? What do you want to do? Only so many rocks can fit into your jar without it breaking. Narrow them down to the most important ones. Once you’re clear, everything else falls into place.
As we discussed in “Guaranteeing Successful 2014 Resolutions”, you’ll achieve S.M.A.R.T. goals rather than stupid ones. Kidding. No IQ test of your goals is required. S.M.A.R.T. stands for Specific, Measureable, Attainable, Realistic, and Timely.
2) Understand why your financial goals are important to you
Because your long-term financial plan will take five or more years to accomplish, you’ll run into scenarios that’ll challenge your resolve. A demotion or job loss could knock you off track. An unexpected illness or accident could thwart your income for an extended period of time. If you understand the “why” your goals, know your passion and drive, you’ll stick with them.
If you need help figuring out what’s important to you, take Payoff’s free financial personality quiz. It’ll help you understand yourself financially.
3) Create a budget
The word budget is not a four letter word. Many think of a budget like a diet and no one likes a diet. A budget is not like a diet saying want you can’t do. A budget represents your long-term financial plan and tells you what you can do and when. Putting your income and expenses down on paper or in Excel puts into numbers your long-term financial plan. To continue with the food analogy, because I must be hungry, your budget is your menu. Mvelopes has a great app that we use to help us keep track our different spending categories.
4) Open accounts for each of your financial goals
Once you know what and how many goals you have, open an account to start saving and investing for those goals. Use apps like the Debt Payoff App to pay down your debt faster. For retirement goals, a company-sponsored retirement account such as a 401(k), defined benefit plan or 403(b) with an Individual Retirement Account (IRA) or Roth IRA is ideal.
For non-retirement goals, open a separate account. Set up automatic payments into these accounts for a specific dollar amount through direct deposit or recurring Electronic Funds Transfer (EFT). By automating these contributions, you’ll eliminate your regular involvement and the risk of missing or skipping a payment.
5) Socialize your long-term financial plan
Share your long-term financial plan with friends and family. Making your goals public makes you accountable. This helps ensure success. Your loved ones will ask you about your plans that will help you make your plan clearer. They’ll ask for updates and you’ll want to share successes rather than failures.
6) Monitor your monthly and quarterly success and tack accordingly
Being successful with your long-term financial plan will require constant engagement. Many obstacles and opportunities will come up over the next five plus years and you’ll want to adjust your budget. For example, if you get a raise or promotion, you’ll have more money that, if allocated correctly, can help you achieve or surpass your long-term financial plan.
These are our six steps to help you be financially successful. Most of them require nothing more than thinking and talking them. Get started!
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- 6 Smart Money Tips for creating a Daily Financial Plan
- 6 Smart Money Tips for Creating a Short-Term Financial Plan
- 4 Principles of a Debt Free Life Podcast Recap