For a younger person, creating a financial plan may seem demanding, scary, or outright impossible to many. If you’re considering financial planning, you need to look at the whole picture, not just a small piece. Financial plans cover many areas, including saving, investing, life insurance, tax planning, philanthropy, and more. Planning takes time and it’s best to work on one piece at a time, rather than getting overwhelmed. It’s also important to identify and avoid the risks that can derail your plan. You may never actually face many of these risk factors, but it’s best to stay prepared no matter what.
Your Financial Plan, Explained
Your financial plan will map out specific trends and actions. This will help you analyze your financial situation and take the steps necessary to adjust and make changes to reach your goals. A financial plan will need to be flexible when it comes to significant life changes as well.
Risk Factors to Consider
In a very broad term, risk factors can be defined as anything that can cause your financial plan to fail. Some of the major factors, but not the only ones, that can ruin your plan include bad spending habits, too much debt, and lack of savings and investment.
1. Spending Habits
Spending money reduces your ability to save and invest for the future. That doesn’t mean that every spending decision is a risk and some expenses such as food and shelter are a necessity. A good balance between the things that make us happy and making sure to save to pay yourself forward for your financial future is best. For example, cutting the two Starbucks a day habit into one will save $5.00 a day. That’s $150 a month or $1,800 per year. Do the math on putting that into savings! Consider these risk factors of overspending and how it plays into your future financial well-being. Many of the items we buy are more important than others. If you’re going to treat yourself, it’s best to do so in moderation. Consider the long-term impact, especially if you have debt.
One risk factor we all need to pay more attention to is the use of debt. Debt is an enabler, allowing us to have things that make us feel good sooner. The cost of that debt and those good feelings is the obligation to pay the debt back plus interest. Once we get used to having the first thing we bought using debt, it’s human nature to want to get the next thing to continue the “happiness”. If this pattern occurs before previous obligations are paid off, it can start a vicious cycle of escalating payments which could lead to a financial failure.
Today, many Millennials are still struggling to pay off student loans, even though they are well into their careers. Investing in education is never a waste of time, but the frustration of not being able to buy a home because of student debt burden isn’t a good situation either.
Debt can also be a factor when the economy isn’t doing too well. If your job is impacted or your income declines during a recession, a lower debt level will make it easier to survive until things get better. They always do get better, but making it to the other side is the key. A strong financial plan will help that happen. By all means, control your debt to a reasonable level.
3. Start Investing Early!
Tired of older people saying they wish they had started saving and investing earlier? Well, they say that for a reason, and it’s usually because they wish they could have that time back to start over. Saving modest amounts in your 20s and 30s and investing it productively makes a successful financial plan a snap. The power of time in building wealth is nothing short of amazing. Einstein said the “compound interest is the 8th wonder of the world”. The process starts slowly but accelerates over time yielding a great result.
This is another reason why controlling spending as mentioned above is so important. A dollar saved can be invested. Even a small savings program turns significant 30 -40 years down the road. Buying into this process is the hardest part for most younger people. But, a disciplined approach will yield huge dividends for your financial plan.
Other Factors to Consider
Life’s uncertainties can really pull the rug out from under us at one point or another. As much as we like to be in control, sometimes it’s just impossible.
One example is the risk of dying. If a single person dies, while tragic, it is probably not a significant financial event. That same person married with two kids and passing away may become a financial catastrophe if the deceased spouse was the main bread-winner for the family. Plans for the kid’s college and the future retirement of the surviving spouse could be upended. Death isn’t the only risk. Other risks include becoming disabled or incapacitated. What’s the solution?
The answer lies in using insurance of various types to protect your loved ones from unforeseen events. Insurance isn’t cheap and you could go broke insuring against every possible outcome. But having basic insurance coverage in place will provide peace of mind and may provide a good outcome that lessens the blow of an otherwise stressful and sad situation. Appropriate insurance coverage should be built into your financial plan.
While we haven’t covered all the risks life entails, the ones we’ve covered are a good start to a sound financial plan. Working with a professional can get you off to a great start. Experience matters and those that have guided families through the planning process and navigated life’s critical events for others can be a great resource.
Choose Integra Capital Advisors for Your Financial Planning Needs
At Integra Capital Advisors, we work with every client to carefully examine their plan. We focus on building an open and trustworthy relationship with our clients to ensure we know which risk factors to take into consideration. If you meet the criteria for our services, you can schedule an appointment here. We look forward to helping you build a brighter and secure future.