Financial Planning Strategies: The Good, The Bad and The Ugly

In honor of October’s National Financial Planning Month, consider these four areas of focus when you embark on your financial planning journey.

Don Milne Oct 7, 2019

Financial planning is a lot like getting your teeth checked out – easy to put off because it can be unpleasant.

Fortunately, you can undertake a lot of financial planning without anyone putting a drill anywhere near your mouth. And for that matter, a lot of financial planning you can do on your own.

But as with any DIY project, not all results are equal. In honor of October’s National Financial Planning Month, consider these four areas of focus when you embark on your financial planning journey.

Financial Planning Strategy #1: Establish an emergency fund

It is a good idea to have an emergency fund savings account at the bank. Make a short-term goal of setting aside $1,000, but make it a longer-term goal to save enough money to cover three to six months of living expenses.

An easy way to build up an emergency fund is to create an automatic bank transfer from your checking account to your savings account to occur every pay period. You won’t miss it and you’ll be surprised how regular deposits to your emergency fund makes it grow and grow.

Remember, it’s a bad idea is to use your credit card for your emergency fund. Your emergencies could end up costing you interest upwards of 15% per year.

An ugly idea is to rely on payday loans for emergencies: The cost to borrow can exceed 500% interest. 

Financial Planning Strategy #2: Start saving for retirement

It is a good idea to participate in your employer’s 401k program, especially when your employer matches your contributions. If your employer does not have a 401k program, it is a good idea to set up an individual retirement account, also known as an IRA. The younger you start, the less you actually have to save, because the power of compound interest works best with long time investments.

It is a bad idea to rely only on Social Security for your retirement needs. Social Security is designed to replace about 20% of your working income – not enough for most retirees.

An ugly move would be to catch up on retirement savings by buying lottery tickets, gambling, or looking for high risk, too-good-to-be true investments. Get-rich-quick schemes usually translate to stay-poor-long.

Financial Planning Strategy #3: Purchase a home

Unless you are planning to move within a few years, it is a good idea to buy a home. Over the long term, the equity that grows in a home as it increases in value becomes an important part of most Americans’ wealth. Rents tend to increase year-to-year, but a fixed interest rate mortgage payment will stay constant. Years from now your housing costs will be much lower than those who stayed with renting.

A bad idea is to sign up for a high-end rental property. A better plan is to find a modest rental and save the difference for a down payment for a home.

The ugly situation is to put off home ownership so long that you have to rent in retirement. Since most retirees have lower income, it is ideal to live in a house that’s completely paid for, instead of dealing with increasing rents year to year while on a fixed income.

Financial Planning Strategy #4: Create a budget

A good idea is to do a unique budget each and every month. It’s kind of like regular flossing and brushing: the more consistently you do it, the more amazing the results. If you make $4,000 in November, have a plan for how you will use all $4,000. You’ll be surprised how far managed money can go.

A bad idea is thinking that tracking your past spending with Mint or Quicken is a good way to budget – that’s like driving by looking in your rearview mirror. Do a forward-looking budget, not a backward-looking one.

The ugly budget method is to use your overdraft notice as a red light to cut back on spending until the next payday. Many people avoid budgeting because it costs too much time. They don’t realize that not budgeting costs too much money.

Ready to take action on these steps? Visit with a banker at your local Zions Bank branch to learn about the different savings accounts available and direct deposit options for your emergency savings.

Here’s to generating good results with financial planning this month.

Don Milne is Financial Literacy manager for Zions Bank.

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