Financial Planning Basics

Many of us have similar goals when it comes to personal finance – get out of debt, become a millionaire, retire early, or become financially independent, to name a few. Three short years ago, my goal was to pay off my 15-year mortgage on my house (in 15 years) and own it free and clear, max out my retirement account, become financially independent, and retire at the age of 40. I had it all figured out. Optimistic, yes. Realistic? Not so much.

What I have learned is that there is no glass slipper for everyone when it comes to financial planning. Circumstances change, people change. Take a look at all of the following major life changes that could strike and how they could affect you financially:

• getting a college degree – public four year bachelor’s for $51,184 and MBA for over $100,000
• expense of having children – $12,000/year for the 1st, $10,000/year for each additional
• medical emergency
• large inheritance -average from boomers equals $106,000
• new career – between the ages of 18 and 38, people change jobs an average of 10 times each
• promotion or layoff.
• Buying a house – average median home price in 2007 was $217,800
• large stock market investment or decline (this past year I had one fund increase 70% in value, while another dropped 50%, so go figure)
• marriage
• divorce

Any one of these circumstances is going to have a drastic impact on your net worth. In just the past three years, I have bought two homes, sold one home, started two new jobs (one of which offers a 50% match on 401K), got married, started a Roth IRA, invested in mutual funds and stocks for the first time, and purchased a vehicle. Who knows what the next three years may hold.

Financial plans are great, but the key aspect to any financial plan is your willingness to be flexible. If you can’t learn to adapt, your plan can begin to hold you back from getting to where you want to be. Here are three ways to keep your eye on the prize:

1. Focus on the end, change the means

If you have a sharp focus on what your goals are, your odds of getting there are going to be much greater in getting there. Without having your end goal in mind, you’re not going to get very far financially. You will most likely lose motivation, focus, or interest. At the same time, flexibility is the only strategy that is likely to get you to where you want to go because many opportunities and traps will cross your path in your lifetime.

2. Invest early to harness the power of compound interest

Invest early and often, and let it grow. $10,000 invested in stocks (that grow 12% annually) at the age of 22 will be worth $1.3 million at the age of 65. If you start investing early enough, you can truly set it and forget it, and maybe even live it up when you hit your mid-life crisis.

3. Don’t lose site of what really matters in life

What good is financial security and freedom if you have nobody to share it with? Don’t let money get between you and your friends and family. With each major financially impactful decision you make in life, ask yourself, “How is this going to effect my relationships with others?”.

What financial curve balls have you been tossed? How has your long-term plan adapted?

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