The people who truly know me, have been asking me to write about this subject…so here it goes! If you want to have financial stability, you need to work hard into acquiring it. It is not only saving here and there, but also making sure you are covering all the important financial aspects of your life. I worked as a Financial Advisor many years ago and I am still an active Agent, however I do not go after people in order to convince them into what they should do. Finances are very personal, and the financial needs may differ greatly from one person to the another. However, I will try to resume and cover the most important areas any person should work on in order to have financial stability in their lives. The one thing you need to know is that this kind of planning requires time and a lot of discipline.
The first thing a person needs is a job! Obviously, you need to generate income in order for you to plan financially. However, I will develop the subject with the assumption on my examples are of a person who is employed by a company who also offer additional benefits. In this example I will part from the premise that the annual income is of $50,000. From that income you need to pay taxes, social security, and Medicare; these should be equivalent to an approximate 12%-20%, depending on the amount of dependents you have and the state you live in. For this example, let’s assume the percentage that is taken from your check with regards to taxes, social security, and Medicare is 12%. From there, you should have a Health Insurance, that hopefully you have that as part of your benefits from your employer (this part is also excluded from the taxable income). The cost varies but let us assume it is equal to $6,000 per year.
Now, one important part of the financial planning is to plan for your retirement. If your employer offers you a 401K Retirement Plan, you should take advantage of this benefit. First off, this money is not taxable, meaning that the percentage that you chose to save in your 401K will not be taxed. Using the example above, if you chose to save 3% of your Income on your 401K that will mean that from your Gross Income of $50,000, 3% of that money will be deducted from your check and placed on your 401K, therefore your taxable income will be less than originally. See the table below with the updated data for all the data provided for this example:
Gross Income - $50,000
401K Deduction (3%) - ($1,500)
Health Insurance - ($6,000)
Taxable Income - $42,500
Taxes/Social Security/Medicare Discounts - ($5,100)
Net Income - $37,400
Another benefit of the 401K is that your employer will match up to a certain percentage; that means that you are getting free money! Your HR Department should provide this specific information, however, assuming that your employer matches up to 3% of your contribution to the 401K, that means that you will not be saving $1,500 on your 401K per year, but instead you will save $3,000! I highly recommend you take advantage of your employer’s maximum contribution in order to take full advantage of this benefit.
The next element you need to make it a part of your financial planning is to get yourself a Life Insurance Policy. Why? The main purpose of a Life Insurance is to cover up for your financial responsibilities in case you prematurely die. This is highly recommended if you have dependents. However, it is best and less expensive to acquire a Life Insurance when you are young. The premium of these policies is determined by your age and your health history. The younger, the least it costs. It is also more probable that you have no health issues when you are younger. An example could be that you can get $250,000 of coverage for $20-$25 per month when you are in your 20’s versus acquiring a policy at age 45; for the same coverage, you will probably have to pay $60-$80 per month. The are many types of Life Insurance Policies out there, but if you research on Google, you will find that the most economical is the Term Life Insurance. Why? Because it covers you for a specific period. You need a Life Insurance when you have no savings and high financial responsibilities that your dependents will inherit if you pass earlier than expected. However, as time passes, you should have a more stable financial scenario and less and less financial responsibilities. Therefore, the need for a Life Insurance decreases. Some people argue that it is best to acquire a Whole Life insurance because you will be insured your entire life and it also accumulates savings inside the policy. I still will go with the recommendation of the professionals (as Google shows) that Term Life Insurance is better. If you want to save money, save it outside your Life Insurance Policy. In the end, you will be able to save more and have more control over your money. If you need to extend the term of your policy, you can always do so.
Now, we have covered Income minus taxes/social/security/Medicare discounts, Health Insurance, 401K Savings Plan, and Life Insurance…but we need to establish a Budget in order to avoid spending more than what you should. Budgeting is key in your financial planning! Your Budget should be divided into two sections, Monthly Expenses and Debts. Your Monthly Expenses should include your Mortgage or Rent, Utilities (Water and Electricity), Transportation Expenses (Gasoline, Tolls), Internet, Food, Cell Phone, Life Insurance, and Car Insurance; all those expenses that are necessary to live. Your Debts should include your car (if you have a Lease or if it is financed), any Personal Loan, all Credit Cards, and any Student Loan; whatever applies to you. In the Income section, you should also calculate your monthly income that way you can have a better picture of how your money will flow. If you have an extra monthly income (such as Child Support or Income from a side job), you should also add it in your monthly income. Having all your income as well as your expenses and debts clearly allocated in your Budget Sheet will make it easier for you to see where your money is going every month. In the example below, I show a Budget Sheet detailing all areas I have mentioned already. I hope that this table is helpful for you, and you can use it from now on:
Annual Income (Gross – Before Taxes) - $50,000.00
Health Insurance (Medical+Dental+Vision) - ($6,000.00)
401K Savings (3%) - ($1,500.00)
Taxable Income - $42,500.00
Taxes/Social Security/Medicare Discounts (12%) - ($5,100.00)
Net Annual Income (After Taxes and Discounts) - $37,400.00
Net Monthly Income (Net Annual Income/12) - $3,116.67
Extra Monthly Income (Child Support or Side Job) - $200.00
Total Monthly Income - $3,316.67
Mortgage or Rent - $1,500.00
Utilities (Electricity & Water) - $150.00
Gasoline - $120.00
Tolls - $40.00
Internet - $50.00
Food - $500.00
Life Insurance - $30.00
Car Insurance - $120.00
Cell Phone - $50.00
Total Monthly Expenses: $2,560.00
Car - $320.00
Credit Card - $75.00
Personal Loan - $200.00
Student Loan - $50.00
Total Monthly Debts Payments: $645.00
Balance after Monthly Expenses & Debts (Monthly Income-Monthly Expenses-Debts) - $111.67
In the sample Budget Sheet, you can see that the more Debts you have the less money you have left every month. In this example, even though I included $200 of Extra Monthly Income, the remaining balance is $111.67. The idea is to get rid of debts as soon as possible, or increase your income, because I am sure you also want to travel, go out, and do fun things! However, for your financial stability, you need to plan these things as well. In the example above, the person is left with $111.67 every month to spare. If the person saves $50.00 every month, it will equal to $600 per year. It is important to monitor your spending and establish a budget that fits your needs.
If you have debts and have money left to spare every month, then you should work on creating a Debt Elimination Plan. You should pay off first the debts that are high in interests. The way to do it is to establish an extra payment every month towards the minimum payment. For example, if the minimum payment of the credit card with the highest interest rate is $75.00 per month, then you should pay the extra amount established for debt elimination. Lets say you decided to pay $50 per month towards debt elimination, therefore you will pay $125 to the credit card instead ($75+$50). When you pay off that credit card, you will continue to pay $125 towards the next debt on your list. You continue to follow this plan and you will be debt free (and save money in interests) years before the time you are currently scheduled to. This simple plan helps you discipline yourself as well as to save money and time. Once you have paid off the bad debt (meaning credit cards and many personal loans), you will then be able to save more money towards your emergency fund and eventually be able to save for other goals you establish for your self (such as the purchase of your first home, traveling, and anything else you decide to).
Now, this are my financial recommendations in a nutshell. I tried to be as simplistic and as short as possible. I really hope this can help you and if you need any help in getting your financial planning running as well as to acquiring more information with regards to Life Insurance, don’t hesitate to contact me. I have followed this plan for years and due to my discipline and professional and educational knowledge, I was able to reach a more stable financial situation. You can also reach your financial goals. Being disciplined in your finances is not easy, but it is worth the sacrifice, as it is with everything else in life. Discipline will always take time and will pay off in the long term.