Financial planning is an important activity because it helps people afford certain lifestyles once they retire. Research indicates that many people are not able to demonstrate financial readiness for their retirement years. Saving for the future or retirement is a challenging process that requires careful planning and follow-through. Proper financial planning involves taking certain steps.
Start Saving Early
Retail investors should start saving early. When it comes to investing, it is never too late to start, even when you are close to your retirement years, because each saving will help cover your expenses. Short-term investments can help you cover your retirement expenses. In addition, certain areas of retail investment such as construction finance, the issuing of second mortgages, and asset allocation will gain greater significance as you get closer to retirement due to decreasing risk tolerance.
Treat Savings as an Expense
Saving regularly over an extended period can be quite challenging considering the many expenses most people deal with and the temptation to spend disposable cash. You can save effectively by treating your savings as recurring expenses just like paying mortgages, rent, and car loans. It is much easier to save if your employer debits the amount from your paycheck. If deductions from your paycheck are made on a pre-tax basis, the amount of income tax owed on your salary also decreases.
Alternatively, consider having your savings deposited directly to a checking or savings account and having the designated savings amount automatically debited to a non bank retirement savings account on the same day the salary is credited.
Save in a Tax-Deferred Account
Contributing certain savings earmarked for retirement to a tax deferred retirement account helps to deter impulse spending due to the tax consequences and penalties associated with spending money deposited in a tax-deferred account. If your income is much more than your expenditure, consider increasing the amount you save on a tax-deferred account. In addition to saving through your employer’s retirement plan, consider contributing to an individual retirement account that may be either Roth or a traditional IRA.
When it comes to retail investing, the old saying that goes “do not put all your eggs in one basket” holds true. You are more likely to suffer significant losses by investing in one form of investment vehicle. In addition, putting all your savings in one form of investment limits your return on investment (ROI). As a result, one of the most essential components of your financial plan is asset allocation. Proper asset allocation involves considering your age, risk tolerance, and whether your assets are designed to grow or produce income.
Consider All of Your Potential Expenses in Your Financial Plan
One of the most common mistakes many people make in retail investing is not considering all potential expenses including medical expenses and income taxes among others. However, including all your potential expenses in your financial plan can help you make realistic projections and plan accordingly using free cash flow calculation tools.
Saving significant amounts of money is great, but the benefits can be easily nullified if you have taken out high interest loans to finance your lifestyle. Therefore, understanding the cash management cycle and working within a budget is an essential element of financial planning.