Today we have a post from Shannon, a regular contributor.
My day job consists of working as a financial planner with clients who are in their 20s and 30s.
The reason why I started my company and chose to work with people who are trying to build assets, rather than have them to begin with, is that I realized how much different my life would have been if I had a planner working with me earlier.
I have made a number of financial mistakes in my life, and probably the biggest one was not planning (especially for large purchases) as much as I should have.
I think that it is easy for us to get caught up in the day-to-day process of living life that we neglect to focus on the bigger picture.
Since almost all of my clients are at the beginning of their working lives and just starting out, one of our primary focuses is planning for the big financial goals they would like to accomplish which could include buying a home, getting married or having a child. All of these major life events cost money and require preparation and the sooner you start the prep work, the better prepared you will be. Here are some steps we take when planning for their major life events.
1) List out your goals
You may not know when you want to accomplish these goals; however, you should at least think about whether or not they are important to you. I meet clients who are not even dating someone but know that they would like to get married. And after further discussion, we determine that if they were to get married that they would have to pay for the wedding. Even a super cheap wedding can add up, so we know that we need to start planning and saving as soon as possible.
Other clients may say that they want to travel more or buy a home at some point. The process of listing these goals helps you focus on what you need to accomplish. Otherwise it is like driving in your car and not knowing where you are going, you end up wasting time and money without determining destinations along the way.
2) Determine estimated costs
Once you have an idea of what you want to accomplish, then you need to determine how much this will cost. If you want to buy a home, you should use census data or websites like zillow to determine average home prices for where you would like to live. If you want to get married, then you should research the average wedding costs in your area. If you want to have a child, it is a very long financial commitment, but it is important to at least estimate how much the first year of having the child would cost as part of your plan.
3) Construct a realistic plan
Once you know what your goals are and how much they cost, then you need to construct the plan for how you will accomplish these. If you are thinking about buying a home, you will need at least 20% of your home price as a down payment in cash, plus cash for closing costs plus cash to reserve for potential home repairs.
Assuming your home price was $150,000, this means that you need at least $30,000 for your down payment alone. Do you have $30,000 now? If not, how long will it take you to accumulate it? Perhaps your plan may include allocating a specific amount in your budget every month that will go towards this goal. For example, you will replace some of your entertainment or dining costs with saving for the home.
I have clients who know exactly how much they need for an event, so they will divide that cost over a few years and determine how much they need per month to put in their savings account. For example, if you needed $30,000 for that home, and you would likely need it in 5 years, then you would need to save $6,000 a year or $500 a month. Do you have $500 a month you can commit to this goal? It is great to have big life goals; however, if you don’t have a realistic plan for how you will accomplish them, then you will never achieve them.
4) Review the plan regularly
One of the biggest issues that people have with financial plans is not in the creation of them, but it is in the follow through of the plan. You need to schedule regular check-ins on your plan to make sure that you are still on target for achieving these goals.
If an emergency comes up then maybe you will have to revise your timing on some of your goals. Maybe you had a medical emergency that cost you $6,000. If that is the case, then instead of buying your home in 5 years, it may take 6 years. The only way that you can know if you are on track or not is by reviewing your plan regularly.
5) Revise the plan for life changes
Anything can happen in life and it is important for you to adjust your plan as your life changes. I have a client who saved for years to buy a home, only to realize that it was no longer a goal of hers. Because of this change in plans, we decided to invest more of her money that she was keeping in cash since she no longer had a near term goal approaching and she could make more money investing it rather than sitting in her checking account.
Without this revision, she would have continued to leave too much money in a checking account where it was barely earning a few dollars a month. When you are checking on your progress to your goals, this is when you should contemplate whether or not they are still important goals to you.
How have you planned for a major life event or do you wish you planned better for one?
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Photo by: James Thompson
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Hey Shannon!
I think this is great advice for people who might have specific goals, and need to get a solid plan in motion to make it happen. But I also used to have the opposite issue – just wanting to invest and grow my money as quickly as possible, but without a specific goal in mind (well, perhaps early retirement, but without a specific amount in mind). Setting some specific goals with dollar amounts and timing has been really important for me to break things down into baby steps and work out the per month savings required. Having a really strong ‘why’ is a big help too.
Sounds like a great, rewarding role you have helping people achieve their goals!
I guess it’s good that I’m not planning any major life events in the near future. I can’t afford them ;)
Great tips Shannon! We do something very similar ourselves to help us reach the things we need and want. For us #4 is huge since our income fluctuates. We’ll go back every 3-6 months to see what we’re averaging over that time and make the appropriate changes so we can be putting away what we should be. Thankfully that usually means we’re increasing it. :)
brokeandbeau Ha! Yes, for some people it will definitely take longer to get to those events, but it is important to know they are out there.
FrugalRules That’s awesome John! It is amazing how many people do not review their progress and I hate having to be the one to tell them they have been off track for a while and they need to adjust in the other direction.
We can’t really afford any major life plans right now, either. Our first goal is to pay off student loan debt, though, and we do have a plan in place for that. We’ve briefly touched on marriage and housing and how much we would ideally like to spend, but things could change.
When I decided that I wanted to start a business, we put together a plan to make that happen. We paid off all of our consumer debt, established an emergency fund of about 9 months of expenses, and when the time came, I felt comfortable to take the leap. Planning makes a HUGE difference when it comes to major life events, that is for sure.
JourneytoSaving I was just talking to a client about how student loan debt is preventing them from making larger plans. It is tough to balance both, but sometimes the best approach is preparing for both at the same time.
We plan on starting a family in the next few years and my dream is to cut down to working part-time or starting my own business. We haven’t planned it out much. Right now our biggest priority is to get rid of our student loans.
Having a plan for anything is key. Start with small steps, and list out what is needed to be done.
I cannot imagine trying to save money for a home on my starting salary back in the day. But initial savings that i did way back then has accumulated so that I could buy rental property. And the rental property has contributed more to my revenue stream than my job.
We are still in the process of building our emergency and savings fund. I think after 5 years or more we would start to plan for our major life events.
Clarisse @ Make Money Your Way It definitely makes sense to build the emergency fund first before you start on the bigger life projects.
This is great advice. I would also add that in addition to an action plan you have a resource plan; people can be a resource that helps you reach your goals. I’m all about thinking of extra streams of income to help you reach your goals. Some goals, such as traveling, may not need as much money as we think if we have people that can help make them a reality by allowing us to sleep in their spare room or couch when we go traveling.