There was once a hardworking man who worked 9-5 day in, day out, for 45 years. He rarely took vacation because he wanted to ‘shine’ as an employee. He stayed at the same job his entire life because it was ‘safe’. He put 10% of his paycheck into retirement savings because it was the ‘smart’ thing to do. He budgeted for a car payment, a house, and lived within his means. At 65 he retired with a comfortable retirement income.
He was living the American Dream. Yet, he didn’t enjoy his working years and was bored when he retired. For 45 years, all he knew was his job. He also wondered what he had missed in those 45 years. And suddenly, once he retired, the one thing he had known for most of his life was gone.
If you’ve spent any time reading about personal finance, you’d think it was a one-size-fits-all formula. Except it’s not. There’s a reason for the ‘personal’ in personal finance. You need to have your own strategy for personal finance centered around your needs and goals. For your financial strategy to serve you well, it needs to be able to factor in these questions.
1. What Do You Want Now?
Assess what you currently want. What you typically spend money on might give you a sense of what you want, but don’t stop here. Sometimes we spend money on things we don’t really want, and sometimes we can’t or don’t spend money on things we do want.
List the things that are important to you. Be specific. What kind of place do you live in? Where do you want to live? What kind of car do you want to drive. Are there daily or weekly activities that you value? What kind of wardrobe do you want to maintain? What kind of meals will you make for yourself? Is going out to eat important to you? Answering these kind of questions will help you develop the spending portion of your budget.
What you want now is not limited to the things you buy, however. You also need to figure out what kind of career you want. For many, a steady 9-5 works. Others have been known to make a less traditional career path work. Of course, a less traditional career may mean a less traditional income.
2. What Do You Want Later?
A financial strategy also needs to factor in your future goals. What are you working towards? These can be recurring goals such as vacations or new vehicles, or one time goals such as a home purchase. Perhaps you have dreams of starting your own business or you really want to take a year off work to do something you’re passionate about. For these goals to become reality, you need to start planning now. Again, you need to make room in your budget for the goals you need to save for.
3. What Are Your Family Plans?
Family is one of the biggest influences on your finances. However, most people spend little time thinking about until it hits. If you are single and plan on staying single for life, you can skip this step. Otherwise, anticipate the changes that marriage and children will (or have already) make on your finances.
A family with children means increased costs. You’ll spend money on everything from food to clothes to diapers. You may need to move to a larger home. You’ll also need to carve out room in your budget for childcare or sacrifice income for a stay-at-home parent.
So how do you prepare for family life, or adjust if it is already upon you? A good start is to learn to live frugally. Even if you’re single with a great income, get in the habit of saving money now. Build up a good emergency fund and get a running start on a retirement fund while you have extra room in your budget. More to the point, by learning to live frugally now, you’ll have less of an adjustment when the increased costs of a growing family actually hit your budget. And if you already have a family, you’ve already experience the effect on your budget.
Starting a family also means that you need to think about life insurance. You now have dependents that you should think about. If you decide life insurance is something you need, NerdWallet has a good guide on deciding how much coverage to buy.
4. When Do You Want to Retire?
In the one-size-fits-all financial plan, 65 is usually thrown out as the ideal retirement age. At 65 you’re eligible for Medicare. Starting at around 60, you can start withdrawing money from your retirement accounts. And somewhere in your 60s, you can start drawing from Social Security. So 65 isn’t a completely arbitrary number. But there’s no reason you have to settle with 65 (or 60 or 70). If you’re in a career you love and want to keep working, keep working past 65 til you don’t love it any more. On the other hand, you may want to retire young so that you can pursue other things.
5. What Does Retirement Even Mean to You?
Often we talk about retirement and assume everyone is on the same page. But retirement can mean so many different things. Your retirement might mean living a quiet life at home. Or it might mean travelling the world. These two lifestyles would require vastly different retirement incomes. And retirement may not mean completely quitting work. It may just mean working part time at a lower paying job that you really enjoy. Or it may involve you creating your own income.
6. What Is Your Tolerance For Risk?
All financial planning involves a certain amount of future prediction. And since no one can accurately predict the future, financial planning involves a certain amount of risk. However, while you’ll have to get used to a certain amount of risk, you can take much of the risk away with a combination of insurance products, low risk investments and conservative planning. Of course, this comes with increased costs and lower rewards. That is the trade-off.
Putting it All Together
Answering these questions helps you put together a financial plan for you. Of course, you may find that all your wants to quite fit together. For example, wanting to work 20 hours a week, have a big house, and retire at 30 likely won’t all work out (unless those 20 hours really pay well). And you may find that you need to take on more risk than you wanted to meet your retirement goals. But at least the answers to these questions give you a better starting point than the stock assumptions that many financial advisers make about you. From here you can prioritize your wants and needs and figure out what’s really important to you.
A journalist spends 15 minutes trying to figure out the good life:
While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.