There is a common misconception that financial planning is just for the wealthy. People assume that because they have a lower income, they can’t possibly have a financial plan. However, it doesn’t have to be like this.
In 2016, Financial Engines came out with a report that stated that only 37% of American workers with incomes between $35,000 and $100,000 have a cohesive financial plan to grow their wealth. In this same study, 48 percent of people with annual salaries of over $100,000 do have a plan. This plan is likely to be more comprehensive.
You can fix this easily. If you are a person who has an annual salary between $35,000 and $100,000, financial planning will help you. Without a financial plan, you put yourself in significant risk of not achieving your goals. If you’re still unsure, here are six reasons why financial planning is important.
1. If you don’t have a plan, it is likely that it will be harder to set, or even meet, your financial goals
Even the smallest goals are important. What if you want to take a vacation with your family next year, or purchase a new house in the next ten years? These large purchases can, and will, impact your financial picture. Both in the long-term and short-term. So, make sure you understand the impact. Plus, you are eventually going to want to retire since no one wants to work for the rest of their lives. If you don’t have a financial plan, it’s going to be significantly harder to attain those goals.
For retirement in particular, the study by Financial Engines also found that people with these financial plans are more likely to save 10% of their salaries toward retirement, while those without a plan in place, on average, only save 6%. Just a 4% difference, when compounded over 25 years, can translate to thousands of dollars.
2. Having a plan can help you manage your current spending habits
One of the basic elements of creating your financial plan involves tracking your spending each month. One of the most important aspects of financial planning is making your household budget and sticking to it. Once you have your household budget in front of you, you can compare your income and expenses and try and cut down those unnecessary expenses. You can adjust your spending to ensure that you’re not strapped for cash at the end of the month. Then, and only then, can you identify the disposable income you could be investing.
3. A financial plan can help you reach your big financial goals
Remember the home purchase example from before? Without a financial plan, it’s going to be harder to save the money for a down payment. You have to learn to walk before you run. Having a financial plan can help inform you of how much it will take each month to attain any of your goals.
A financial plan can help you understand your cash flow for purchasing your first car to having enough money saved up to help your children get a college degree without a substantial amount of student loan debt. The Financial Engine study found that only 41 percent of middle-income workers have plans to save for their children’s higher education. You don’t have to be part of the 60%!
4. It can help protect your loved ones
What would happen if you died unexpectedly? What financial burden would fall to your children or your spouse? Financial planning can help point out the level of protection you need to get to replace your salary for your dependents. This could be in the form of life insurance, or disability insurance. Low cost term life insurance can help protect your family in case of sudden death.
On average, 67 percent of the middle-income earners have purchased life or disability insurance, while 83 percent of their upper-income counterparts have these policies in place, according to the Financial Engines study. It is affordable, plus a financial advisor can quickly provide direction on just how much life insurance you really need
5. Following a financial plan can help reduce credit card debt
People with a financial plan tend to have less credit card debt, with a plan to pay it off, according to the 2013 Household Financial Planning Survey and Index. This survey was conducted by the CFP Board of Standards and the Consumer Federation of America.
This survey also found that 38 percent of adults without a financial plan in place have significant credit card debt, while only 47 percent of these people have plans to reduce it. These are also the industries that can at least afford 15-25% interest on revolving debt.
Even if you don’t have an in-depth financial plan, you are less likely to carry such debt if you just have a budget! The survey found that 61 percent of these “limited planners” have little to no credit card debt at all. And only one in five people with a comprehensive plan have significant credit card debt, with 92 percent having a plan to pay it down.
6. A plan can help you be prepared for a financial emergency
Life happens, it throws curve balls to keep us on our toes. What happens if you’re not prepared for these curve balls? A financial plan can help you build your emergency fund and avoid using a credit card to cover large expenses.
Financial experts recommend that you have anywhere from six months to a year’s worth of your daily living expenses saved. It is important to have these savings in an easy-to-access fund, like a saving’s account or money market fund for example.
Building your family’s emergency fund takes time and dedication, but if you have a financial plan in place, odds are you’ll be more likely to stick to putting money away. Even $200 a month can make a huge difference! If you have a financial plan, it shows you how to save that money every month. With a plan in place, you’re far more likely to build that fund.
So, what’s next?
The question is – do you have a plan? Have you outlined your household budget? Have you outlined how much money you need to save to attain your goals? If not, start today! If you can’t save a lot, that’s okay. Start by saving what you can each month. From there, you may be able to boost those savings by reducing some of your less important expenses.
We’d love to help you in planning for your future. If you have questions or would like to sit down with our financial advisor to discuss your options. Give us a call at 479-876-2100 to schedule a free consultation or click here to request a call.