After reading a MSN Money article about financial plans, I began thinking about how our own family's financial plan helps us with our money. The article noted that, "Only 31% of financial decision makers in families say they have created a comprehensive financial plan either on their own or with professional help, according to the 2012 Household Financial Planning Survey conducted by the Certified Financial Planner Board of Standards."
There were certain takeaways from that article that I agree with and that have helped us in our own personal finances. And while we are anything but rich, this doesn't mean that there aren't a variety of ways in which having a financial plan -- be it modest -- helps us organize and make the most of our finances.
Breaking down our income
A major part of our financial plan - especially since I'm self-employed - involves breaking down our income as well as expenses so that we can see where our money goes and in what amounts.
This exercise in turn allows us to see where there are opportunities to better maximize income while minimizing expenses. Not only can we see how our income is working for us through gauging returns upon things like retirement funds, savings, and my various self-employed income streams, but we can look for ways to cut costs on everything from transportation and home-related expenses, to clothing, food, and travel.
While a budget and additional tracking spreadsheets for things like utilities, home costs, vacations, and baby births are integral to gauging where out money is used, we also find that it is important to build a reserve amount into our budget. This amount tends to be in the 5 to 10 percent range of our budgeted expenses in order to build flexibility into our finances so that it can bend with the unexpected costs that tend to come along.
Finding ways to save and maximize our money
Another aspect of our financial plan revolves around finding ways to best maximize our money's effectiveness. One such way is through the reduction of debt. According to creditloan.com, the average American's interest payments on debt total $600,000 over the course of a lifetime.
To minimize the effects such debt can have on us, we've made several moves. Not only do we live free of credit card debt, but we've made paying off our home so that we can live mortgage-free a priority in our financial plan. Creditloan.com also notes that "After 30 years of making payments, a homeowner with a $240,000 mortgage loan will have paid over $580,000 on his/her house."
Of course, while such statistics can range depending upon a variety of individual factors, they are also why, after paying nearly $25,000 in interest on our previous home in the three years we lived there, we decided to downsize to a home that was half the price so that we could rid ourselves of our mortgage. And if we can remain mortgage free from here on out, we could end up saving ourselves hundreds of thousands of dollars in associated interest.
A financial plan can be useful for future planning, but it can also be a helpful tool in gauging progress and reviewing the past. Part of our financial plan involves tracking assets so that we can review the performance of these assets over time. We can watch as our home value declines. We can see our retirement accounts plummet and then rise again. We can watch our emergency fund diminished as things like child births, home sales, relocations, car repairs, and similar issues take their toll upon it, and then watch as we rebuild it over time.
Seeing this progress - or lack thereof - is important in helping us make future decisions regarding our finances. Being able to gauge our retirement account progress over the past six years shows us that we're been nearly flat on returns. This has had us using money that we might otherwise have put into the stock market to pay off things like our home. Meanwhile, some of our old government savings bonds have been providing a strong 4 percent in tax-deferred (and possibly tax-free if used for our kids' college education) interest. Meanwhile, knowing that our bank savings has only been earning in the range of .05 percent over the last year has kept us from cashing these bonds.
Therefore, this aspect of our financial plan is critical to helping us make informed decisions regarding our money and creating and updating our financial goals.
Grounding ourselves in reality
A financial plan can at times be painful. It can point out some of those harsh realities that may be easier to ignore than confront. And while these realities might not be fun, they can open our eyes to what needs to be done for make the most of the situation we have before us and focus us more on experiences and family than consumer bobbles and keeping up with the Joneses.
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The author is not a licensed financial professional. The information provided in this article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.
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