Being a business owner, my year is through, mainly because there isn't a lot I can do late in October that will work fast enough to make a difference this year. That is why I am in meetings for the next month with my consultants and staff to provide a framework for next year. As the old cliché goes " I want to hit the ground running" in the New Year. Does that mean I am planning my own personal finances as well? An easy answer is yes, but it isn't true. I am not. Like any professional worth his or her salt, I never seem to get around to it. That is my excuse, what's yours?
My wife and I will talk endlessly about what we did this year, congratulating ourselves over the positive moves and bemoaning the not so positive ones. But our discussion generally ends there. Not this year! We are going to plan. She has already told me I spend too much money on lunches, and I think (and have foolishly told her) she doesn't always need that new purse, even though she reminds me she also makes the money to buy it. In case you don't realize it, this is not planning. This is a simple attempt at making your spouse either earn more or spend less. It doesn't work, but it gets the air cleared between you.
Let’s talk planning instead of "air clearing". Planning, especially financial planning, is a lot more complex than you think and probably will take you a lot longer than the time you are now willing to allocate to said endeavor. The reason? Everything is tied together and one move usually brings you to another. In trying to make things work and end up with something in the way of money by the end of a given period, you cannot stretch one way without cutting something from another place. Money is a rare resource that I am sure your parents told you "doesn't grow on trees" (with deference to the farmers).
You need to start with a long-term picture and then fit the yearly budget within that framework. It doesn't matter if you are in your 30's or 60's, you need both plans.
Long-term plans are for slowing down or retirement. Short term plans are for managing the money in a way that you can comfortably rely on the accuracy of your long-term goals.
The first thing when working on your long-term goals is to "hedge your bet". You do that with insurance. No need working toward a retirement if you don't have the proper insurance because one unplanned occurrence, illness or accident, and you could be wiped out. The two types of insurances I would recommend are disability insurance, which will give you an income if you become disabled, and long-term care insurance, which will help take care of you when certain physical things go wrong.
I am not a big believer in overdoing your retirement savings, and if you read my article "Retiring the Retirement Plans", from August 15th of this year, you will find that if you just pay off your house, no matter what it is worth, it just might be all the retirement you need.
Before you start your short term planning, I must reinforce the notion that you are never too young to start your retirement planning. The sooner you start, the easier it will be.
Short term planning, known as balancing the budget, is not as hard as you would think. All it takes is a touch of realism and a willingness to compromise. Heck, if you could do that, you could run for Congress! Excuse me, I just got lost in thought.
Realistically, you need to be honest with yourself and your spouse about what you see as the challenges that loom ahead in the way of financial commitments. Is it college funds, relocation for work, a desire to change occupations, more children in the future? Whatever it is, get it out in the open and try to see what the costs will be.
Next is to look at the income side of the equation. What is realistic and what is futuristic? What can you count on and what do you hope for? Do not confuse these, as this could be a budget buster. When you are pretty sure of the number, you are ready to set up the plan.
Knowing what you are going to make, or at least having a good idea, you can now take a look at the luggage you are dragging with you – your debts. Get them all out there, including the accounts that each of you might have that you haven't told anyone about, including your spouse. However, I know about them because I have seen your credit report. Let's make this thing work! List the amounts and list the monthly payments and then look and compare this to your income. In most cases, it is greater, or at best equal to the income part of the equation.
If you own a house, you can refer to the articles I have written, "How Important is the Right Mortgage" from August 29th, "Time Has Come, Really" from September 6th, and "Bad Credit, Easy to Get, Easy to Lose" from September 7th of this year. You can use your house to set up a better budget and one that works. You can devise your own plan to make it all come together or you can seek help. There isn't one right answer. Doing nothing is the wrong answer, however, so please take action.
The missing piece in all of this is reserves. No matter what you do, if you don't have reserves, you will return to the current situation again and again. I wish to refer you to my article of July 18th, "What Reserves", and note that reserves are the real lifesaver in planning, both short term and long term.
The New Year is just around the corner and the question remains – will it be a new year or just the repeat of all the previous years’ struggles with the financial aspect of life?
What is your answer?