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What is financial planning
Financial planning is an ongoing process that needs to be adapted to suit different life stages. The financial goals and priorities of a 25-year-old will be different from those of a 45-year-old or retiree.
Understanding the basic steps of financial planning can help you create a plan that is tailored to your specific needs and goals.
The early 20s: At this stage, you’re probably just starting your career and may have student loan debt to repay. Your primary focus should be on building an emergency fund and paying down high-interest debt, such as credit card debt or student loans. It’s also important to start saving for retirement, even if it’s just a small amount each month.
The late 20s and 30s: As you get older, you may start thinking about buying a home or starting a family. Your financial priorities will turn to saving for a down payment on a home and building an emergency fund that can cover several months of expenses. You’ll also want to continue to focus on paying down high-interest debt and growing your retirement savings.
The 40s and 50s: As you approach your prime earning years, your financial priorities will shift again. You’ll want to focus on saving for your children’s education, maximizing your retirement contributions, and paying off your mortgage. It’s also important to start thinking about your long-term care needs and planning for potential health care costs in retirement.
The 60s and Beyond: As you approach retirement, your focus will shift to creating a sustainable income stream and planning for health care costs. This can include downsizing your home, paying off outstanding debts, and setting up a plan to withdraw money from your retirement accounts in a tax-efficient manner. It is important to keep in mind that these stages are not set in stone and may overlap.
Stages of financial planning
Here are the steps, according to Barbara O’Neill, Ph.D., CFP® Extension Specialist in Financial Resource, Management Rutgers Cooperative Extension
The 20s and 30s – Debt repayment and household formation
The 40s and 50s – Peak earnings and wealth accumulation
The 60s – Preparing for retirement and retirement
The 70s and up – transitions and wealth distribution
Financial planning aged 30 to 40
- Financial independence from parents (e.g., independent living and no „subsidies“ to pay for household expenses such as insurance premiums and cell phone bills)
- Student loan debt fully repaid or close to repayment (e.g., standard 10-year repayment plan)
- Annual salary (1x) saved for retirement
- Good credit history established with a credit score in the low to mid-70s or higher
- Regular saving/investing and at least three to six months of income set aside for emergencies
- Educational credentials earned or near completion (e.g., certificates and graduate/professional degrees)
- Have up-to-date estate planning documents and life insurance to protect dependents or co-signers, if applicable
Financial planning aged 40 to 50
- Three times annual salary (3x) saved for retirement; saving at least 15% of gross income
- College savings established for children, if applicable
- Increased investment expertise and diversification of investment portfolio assets
- Increase human capital (i.e. job skills and knowledge) to remain employable and earn raises/promotions
Financial planning aged 50 to 60
- Six times annual salary (6x) saved for retirement; Make catch-up contributions to retirement savings plans
- Increased knowledge of the specifics of social security, healthcare, and employer pension benefits
- Increased knowledge of aging parents’ finances and communication about care issues
- Use financial advisors if needed as net worth increases and finances become more complex
Financial planning after the age of 60
- Eight times annual salary (8x) saved for retirement
- Paid off mortgage, home loan and credit card debt before retirement
- Catch-up retirement strategies used, if necessary (e.g., downsizing, relocating, working longer, and selling assets)
- Learning new skills and/or making other preparations to move into a job or volunteer role in „second action“
Each person has a unique financial situation and goals, so it’s important to have a financial advisor who can help you create a plan that is tailored to your specific needs. It’s also important to regularly review your financial plan and make adjustments if necessary. Life is full of changes and surprises, so it’s important to be adaptable and ready for the unexpected. Overall, financial planning is a lifelong process that requires discipline and a clear understanding of your goals and priorities. By understanding the basics of financial planning and creating a plan that is tailored to your specific needs, you can set yourself up for long-term financial success.
