Have a Plan For Your MoneyWhen it comes to money, planning is where it all begins. Everything you do with money requires a plan, whether you realize it or not. Without a thoughtful plan, you’re bound to get lost or confused.
Planning doesn’t have to be difficult. We have simplified basic financial planning into four questions—you could ask them whether you’re buying a car, taking a trip, or setting your sites on retirement. Here are the four questions to ask-and ask them again periodically to see if your answers have changed. To learn more about any of these topics, click on the highlighted words:
1. Where do you want to be?
2. How much time do you have to get there?
3. Where are you now?
4. What vehicles give you a chance to get there on time?
Where Do You Want to Be?
Setting an investment goal is no different than choosing a travel destination-you’re trying to get somewhere with your money.
- Plan A: What is the event for which you’re planning? Is it a new car, new home, a comfortable retirement?
- Part B: What’s a good estimate of the amount of money you will need to achieve that goal?
Knowing your goal means every thing in money management. If you don’t know where you want to be, you won’t know how to get there. And you won’t know how to avoid or minimize the risks along the way. You may not even recognize the risks at all.
How Much Time Do You Have to Get There?
The time you have to reach your financial destination often influences whether you are in a rush, or can plan a more leisurely course.
Time is the third question. Like planning a trip, once you see how far you have to go, you will:
- Be okay with the time you set to get there.
- Give yourself more time to get there.
- Adjust your goal or starting point in order to shorten the distance.
Time is a huge factor in investing. The relationship between time and distance always plays a huge role in planning. If you have five hours to travel 500 miles, you’re going to think about planning your trip differently than if you have five hours to travel only 50 miles. It’s the same with money. You have to know (1) how far you need to go and (2) in what period of time, in order to create an intelligent plan for getting there on time.
Where Are You Now?
How much money can you put toward your goal now? What’s your starting point? Whether planning a trip or a financial goal, it’s critical to know the distance between where you are now and where you want to be.
Let’s say you want to buy a car for $20,000. How much money can you designate toward this goal right now? Your answer will affect how you plan to reach your goal. Perhaps you have $25,000 in a retirement plan and $5,000 in a bank savings account. You don’t want to touch your retirement savings, but you think you can set aside $2,000 from your savings account toward the car.
If so, then "where you are now" = $2,000. And the distance you have to travel is $18,000 to buy the car.
How do you know where you are now?
In terms of money, there are two ways to know: Your net worth, which is the total value of everything you own, minus the debts you have to repay; and your budget (or cash flow picture), which shows your monthly income and spending patterns. It’s a snapshot of how money flows into and out of your life every month.
What Vehicles Give You a chance to Get There on Time?
When you plan a trip, once you know how far you have to travel and how long you have to get there, choosing the vehicle and the route to take becomes almost second nature. It can feel like second nature with investing, too, once you answer the first three questions.
For example, what if you had five hours to go 500 miles? You could take a car and speed, averaging 100 mph. You might take a train that goes that fast but won’t take you door-to-door. You could take a plane that flies 600 miles an hour, and get there early. You might try to get there by walking, or running, or riding a bike, but you’re guaranteed not to get there on time.
Give yourself at least a chance
When planning, first look for vehicles that have at least the potential to get you to your goal on time. In the travel example, they would be the car, the train, and the plane. You may not be entirely comfortable with any of those-you might feel safest walking, running, or on a bike-but you’re guaranteed to fail.
This applies to your money too. First, look for vehicles that have at least the potential to reach your goals If, for example, you have two years until you want to get a new car, and you start out with $15,000. You will need to save $5,000. You should save the extra money in a safe investment, such as a money market fund, because you will need it soon, you can’t afford to lose any of the money, and this investment account will get you there on time.
Or let’s say that you want to retire in 15 years and you need to save $200,000. Putting most of your money in a money market account probably won’t get you there on time. Some combination of stocks, bonds and cash is more likely to help you reach your goal.
For more information call consumer Credit Counseling at 1-800-251-2227 or contact their Web site at www.cccsinc.org.
You may also call Pacific Employee Assistance for more information at 253-697-8350 or 877-223-7428.