Thursday, May 1, 2008

Creating Your Financial Plan - Step Four

Today’s step will vary quite a bit from person to person. At least write something down. Even if you just write the name of the step so that when you update your plan later you will remember that there are more steps. Now, today you will see this is a combination of three goals. You can put them all together or make them all separate. It depends on what your needs/situation is/are.

Here is Julia’s Step Four… very very simplistic

Step Four- Retirement, College Savings, Pay off Mortgage

Goal: Save for Retirement. Save for a home. (Remember Julia is single and renting.)

Plan- Once savings is built up begin saving up $3000 to start an IRA at Vanguard.
Once retirement savings is in place begin saving for a down payment on a home.

Completion date- ??

Notice the items listed in the step don’t match her goals. That is because she doesn’t have children so there is no saving for college right now for her. If she decided to get married or have a child, she would need to rework her plan to make room for those things.

Also her goal under mortgage is listed as “Save for a home” because she does not have a home right now. I will write more on the mortgage step below.

So her goal is to save for retirement first. She must save $3000 to open and IRA with Vanguard (her choice, don’t take this as retirement advice, you have to make that decision for yourself). Then she will take some amount of money (hopefully enough to max out her IRA) and put that toward retirement monthly FROM THIS POINT ON. This is going to be an ongoing step until she retires.

Now, it seems like a crazy idea to save for retirement before saving for your own kids, but you need to make sure you are taken care of first so your poor kids won’t have to take care of you. If they have to take out student loans, they have to, but it is better for them to do that then have to help you out financially later on.

If you ARE at the saving for college step then you will also allocate a certain amount to that each month. Now that you have all of your debt paid off this could be something like the following…..
If we use Julia’s figures $625

Retirement $225
College $200
Extra Mortgage payment $200

Remember you have been paying your mortgage all along as part of your monthly budget. Your monthly budget does not figure into the financial plan except for your debt and savings payments, but obviously you are going to be paying for groceries, gas, etc while doing the steps. The money we discuss here is above and beyond your monthly expenses. So the extra money you now have from paying off your debt can be spread out to cover retirement, college and paying extra on your mortgage each month.

Once again, this is your plan. You have to decide where to best put the money. I do believe the order set out in this plan is a good one. But in the end it is your money.

Well, at this point you should have a rough draft of your own plan. Read over it, work out any bugs and keep it as is or make a new shiny copy. You may even want to type it up on your computer to save for later use. Join me tomorrow for the wrap up.

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