How much thought have you put into your financial plan?
From my career observations, it’s clear that successful businesses have a solid financial plan at their core. We could all benefit from applying this same approach to our personal finances. That’s why I recommend every household sets up a financial plan for success.
But how do you do this? What are the right numbers to aim for? And what goals should you be working toward? In this post, we’ll answer these questions and present a sample financial plan to help shape up your budget.
Based on insights collected at My Money Design, here are some key percentages of your gross income to consider for your financial plan:
1. **Long Term Savings (Retirement): 12%**
– Financial experts suggest that saving 17% of your gross income for 30 years maximizes the chance of your retirement income lasting over 30 years, regardless of market conditions. If hitting 17% feels too tough, aim for at least 12%. You might need to work longer or take on more risk, but it’s a tradeoff for saving at a lower rate. Simplify retirement saving by using employer 401k and IRA funds, and invest in stock and bond mutual funds. Also, ensure you maximize any 401k employer matching contributions – that’s free money!
2. **Short Term Savings (Emergency Fund): 4%**
– Life throws unexpected costs at us all the time. Saving 4% of your income for short-term emergencies helps build a cushion for such surprises, reducing stress and avoiding debt.
3. **College Savings: 2%**
– To give your children a strong financial start, aim to keep them out of college debt. Start early by saving 2% of your income per child in a college savings plan like a state-sponsored 529 plan. Over 18 years, even small contributions can make a significant difference.
4. **Insurance: 3%**
– Protect your assets and financial well-being with adequate insurance: health, life, home, car, and disability. Check what your employer offers; many jobs provide substantial benefits that could save you money. For anything not covered, plan to spend about 2-4% of your pay on reputable insurance, often getting discounts when bundled.
5. **Mortgage: 25%**
– Keep your mortgage under 25% of your gross income to avoid financial stress and ensure you can meet other financial goals. This includes all components like taxes and insurance.
For someone earning $60,000 a year, here’s a summary based on the above percentages:
– Long Term Savings: $7,200
– Short Term Savings: $2,400
– College Savings: $1,200 (per child)
– Insurance: $1,800
– Mortgage: $15,000
If this plan doesn’t align with your goals, you have two main options: reduce spending or increase income. Increasing income doesn’t necessarily mean getting another job; it could involve creating passive income streams, such as earning dividends from stocks, rental income, or advertising revenue from a website.
Remember, this financial plan is just a sample. Your spending and saving goals should fit your unique needs. Adjust these figures to make them work for you. The key is to carefully consider each category and have discussions with your significant other about your financial future. The sooner you create a plan for your money, the sooner you can make it work harder for you.
