Jim at Blueprint for Financial Prosperity recently offered some tips on how to draft a basic financial savings plan, a tool that could help me craft a road map for my future. He says that failure to plan is one of the seven deadly sins of personal finance. I agree. I believe that the road to wealth is paved with goals, and planning is one of the most important parts of the journey.
Jim writes that the roots of his planning technique are grounded in the MBA classes he recently completed. He’s developed a system that reminds me very much of my spending plan, but focused on the long term. Here are his recommendations:
- Create a rough draft. Jot down anticipated major expenses between now and the time you retire (or whatever future date you pick). You don’t need to be precise. Just make your best guess as to when you’ll buy a new home (and how much you’ll spend), when you’ll have children, etc. The key here is to create a framework, not to get things exact.
- Calculate savings needs. Once you’ve listed your estimated future expenses, work backward for each item to create an annual budget. If, for example, you decide you want to buy a $15,000 car in five years, you’ll need to save roughly $3,000 a year. The calculations are a little more complex, but this is the basic concept: after you’ve set a target, break it down into smaller chunks.
- Adjust your plan. After you’ve computed your annual budget for your various goals, ask yourself whether your expectations are realistic. You may need to reduce your target spending (maybe budget for a $10,000 car) or to delay the spending (plan to buy the car in seven years, not five).
- Consult with a friend. Once you have a plan in place, find somebody you trust and ask them if it makes sense. It’s easy to lose sight of potential problems when you’re mucking around with the details. Sometimes an outside observer can point out flaws or suggest improvements.
- Revisit annually. Your circumstances are constantly changing. Goals and plans that were right for you last year may no longer be appropriate. I’ve been learning this myself. Eighteen months ago, I set a list of 101 goals I wanted to accomplish in 1001 days. I’ve done many of these things, but others are no longer priorities. It’s important to periodically re-evaluate your plans.
For much more detail, consult the full article. Jim notes that this sort of savings plan focuses only on the expense side of the equation. You may find that in order to meet your goals, you need to boost your income.
Kris and I have never created a long-term financial plan. When something major comes up — like buying a house — we sit down and brainstorm a plan, but most of the time we just wing it. Now that I’m approaching 40 (I turned 39-1/2 last week!), I’m beginning to think more about the future. I’ve always been a spontaneous sort of guy, but now I’ve reached a point in my life where I want a little less uncertainty. I want to have a destination in mind, and I want a map of how to get there.
To that end, when Kris and I take our brief vacation later this month, we intend to spend some time developing a long-term plan. (In between horseback riding and kayaking, of course.)
Photo by mamchenkov.