Nine Financial Planning Basics

  1. Develop a financial reserve — Being prepared (with 3 to 6 month's living expenses) can help relieve financial anxiety. Use an automatic savings plan to save a set amount each paycheck. The fund will grow and you may end up not even missing what you save each month. 
  2. Get rid of high interest rate credit card debt — If you are carrying over balances and paying interest, cut down on your card use, pay more than the monthly minimum or find a different credit card with a lower interest rate. 
  3. Develop a household budget — To make the process easier, call it a "household spending analysis." Understanding how you spend your money can highlight how to spend less. Consider using financial management software to help organize your finances and save time. 
  4. Save for retirement — Your retirement lifestyle is dependent on decisions you make before retiring. Take full advantage of your employer's retirement plan. Participate in the plan, contribute as much as you can, and try to get any available employer "match." Then consider contributions to an IRA or Roth IRA. 
  5. Be sensitive to taxes — No one likes to pay more income taxes than absolutely necessary. Keep good records of potential deductions like mortgage interest, state and local taxes, charitable contributions and certain medical expenses. Also, take advantage of tax deferral or preferential tax treatments on your investments. 
  6. Have a sensible investment strategy — Start with an asset allocation goal that divides your investments into equity, fixed income and cash investment categories based on your time horizon (age) and risk tolerance. If you are younger and more comfortable with risk, allocating a larger portion of your funds to equities may help you earn the higher returns historically found with stocks. However, all investments involve risk and past performance is no guarantee of future results. 
  7. Be adequately protected — Insurance provides protection against the unknown. Make sure your possessions, life and health are adequately insured. Examine the level of deductibles and the coverage amounts to get the protection you need at the lowest cost. Consider an umbrella liability policy for additional coverage above what is provided in your homeowner and auto policies. 
  8. Take care of estate planning — A well thought out plan lets you decide how your assets are distributed, can reduce estate taxes and cover other issues. A "durable power of attorney for finances" designates someone to make financial decisions if you are incapable of making them and a "durable power of attorney for health care" designates someone to make medical decisions if you are incapacitated.
  9. Finally, organize your records — Having a system for handling expenses and keeping organized records saves time and reduces stress.