Roughly one-third of the population made resolutions for 2020.
The most popular resolution? Fifty percent of people said theirs was to lose weight, but not far behind was “save more money” at 49%.
As I’m sure you’re aware, as a whole, we’re not great at sticking to resolutions. Of those who set goals for themselves, only 7% actually followed through when the end of the year came around.
Achieving goals is hard, and saving money has proven to be one of the hardest goals there is for many people in America.
A big part of that could be because we don’t understand how to make a good, solid, successful financial plan. That’s why today we’re going to look beyond the basics of financial planning to identify four key elements of successful financial plans.
1. Successful Financial Plans are Practical
A successful financial plan boils down to the following practical pieces:
- Your goal – How much do you want to save? If you’re trying to put a down payment on a house, then it may be 20% of the total cost of a house you can afford. If you’re saving for college, it might be 30% of the expected tuition and fees.
- Your time horizon – This is a fancy way of saying “how long do you have to hit your goal?” It might be 1 year, it might be 30 years.
- How much you have already saved – The answer might be $1 or it might be $1,000. Whatever it is, this is your starting line.
- How much you can put away every year – Divide your goal number by the number of years until you want to hit your goal. The answer is the amount you need to save every year. Of course, that doesn’t all have to be deposits in your savings account, especially if you already have some money saved. And, if you invest, you might be able to get yourself a nice helping hand from the markets.
That’s it. No matter how much you hear people talk about interest and IRAs and 401(k)s and whatever else, a successful financial plan always boils down to these four basic pieces. Everything else is just tools intended to help you go farther faster, but they’re not essential.
2. Successful Financial Plans are Simple
The best plan in the world is worthless if you can’t understand and implement it on a basic level. If you build a plan that’s 50 pages long and requires frequent manual interventions to keep it on track, then chances are your plan will come off the rails at some point. And once a plan goes off-course, getting it back can be incredibly difficult.
Saving and investing can get very complicated very quickly. The simpler you can keep it, the better. Try fitting your plan in this simple template:
I want to save [AMOUNT] by [DATE]. I have already saved [AMOUNT] and can put away an additional [AMOUNT] per month/year.
This basic formula can get you very far. Yes, adding more tools and strategies to your plan may help you save more quickly, but if they confuse you to the point where you don’t understand how your plan works anymore, then you’re better off without them.
3. Successful Financial Plans are Focused
People who set goals are 10x more likely to succeed. By setting a goal that you are specifically saving toward, you are putting yourself on the track to reaching it.
Not setting goals is like in Alice in Wonderland when Alice asks the Cheshire Cat for directions without knowing exactly where she’s trying to go.
ALICE: What road do I take?
CHESHIRE CAT: Well, where are you going?
ALICE: I don’t know.
CHESHIRE CAT: Then it doesn’t matter. If you don’t know where you are going, any road will get you there.
In other words, you have to have a destination (or goal) in mind if you want to get anywhere.
Without a goal, you’ll have no idea how much to save, when you want to save it by, and when you’ve succeeded.
The best plans are built around goals.
4. The Best Financial Plans are Informed
Even the most successful financial plans are only as good as the people who created them.
If you build a plan to save for your child’s college but fail to incorporate 529 plans, then you may still reach your goal, but you’ll be making it much harder on yourself than it needs to be.
In the same vein, if you create a plan to save for retirement but don’t know how to take full advantage of your benefits at work, then you could be severely limiting your ability to save without even realizing it.
As the old saying goes, “You don’t know what you don’t know.”
Yes, the best financial plans are simple. But the financial world is full of twists, turns, landmines and random tax penalties (and deductions) that you would never expect if you’re not looking out for them. (Did you know in New Mexico you no longer have to pay state taxes after you turn 100?)
Financial advisors make it their business to know how to navigate the often confusing world of saving, investing and planning. By simply sharing your plan with an advisor to get their input, you can get their professional insights and steer clear of any hidden risks out there.
Successful financial planning is simpler than some people would have you believe. By keeping it practical, simple, focused and informed, you can make sure that you’re well on your way to reaching your goals.