Have you decided to put your finances in order in 2024? Making a New Year’s resolution is one thing, but how do you actually go about it?
Finances underpin every aspect of our lives, from saving for a holiday to getting a mortgage to planning for retirement. Missing something out of your financial plan could mean being woefully unprepared or out of pocket when life changes happen.
To help you avoid this, we’ve put together a free financial planning checklist. This will give you a clear roadmap of what you need to do to be financially prepared for any eventuality.
Read on for a detailed guide to creating and achieving your financial goals!
Understanding Financial Goals
The very first stage of financial planning is knowing your financial goals. These are the specific targets you aim to hit with your financial resources, such as a savings plan for retirement.
Setting Financial Goals
Your financial aspirations can take many forms, from buying a home to preparing for retirement. To set financial goals:
Assess Your Current Financial Situation: Know your net worth by listing your assets and debts.
Identify Clear Objectives: Specify what you want to achieve, for example, "Save $20,000 for a down payment on a house".
Assign Time Frames: Establish when you want to achieve each goal, such as short-term (within a year), medium-term (1-5 years), or long-term (more than 5 years).
What your financial goals are is personal, and you may well have multiple goals. Examples of common financial goals include:
Build an emergency fund
Get out of debt
Buy a new phone
Go on an expensive trip
Build an investment portfolio
Get a mortgage
Retire early
Leave an inheritance for your children
Prioritizing Financial Objectives
Not all goals are created equal. You'll need to prioritize your financial goals based on urgency and importance:
Essential vs. Non-Essential: Paying off high-interest debt might be more urgent than saving for a vacation.
Short-Term vs. Long-Term: Short-term goals such as building an emergency fund might take precedence over long-term goals like retirement savings.
Feasibility: Consider what's achievable. You may need to adjust the scope of your goals or your timeline as needed.
Use this structure to guide your financial planning and ensure your goals are clear, achievable, and prioritized effectively.
Creating a Financial Plan
Now that you know what your goals are, it’s time to create a financial plan that will help you achieve them. Here are some of the core concepts that will give you a strong financial foundation.
Budgeting and Expense Tracking
If you want to be able to afford your future goals, you must create a budget. List your monthly income sources and use a spreadsheet or budgeting tool to track your expenses across various categories such as housing, utilities, groceries, and entertainment.
Category | Budgeted Amount | Actual Spending |
|---|---|---|
Housing | $900 | $900 |
Utilities | $300 | $285 |
Groceries | $500 | $471 |
Entertainment | $200 | $234 |
Total | $1,900 | $1,890 |
Adjust your budget as necessary to reflect your actual spending habits. Regularly reviewing your expenses will help you identify areas for potential savings.
A common rule of thumb is the 50/30/20 budgeting method. This involves spending 50% of your income on needs (rent, bills, food, etc), 30% on wants (restaurants, streaming services, hobbies, etc), and saving 20% for the future (savings, investments, pension, etc).
Of course, this is just a general rule and everyone’s personal financial situation is different.
If you need help with budgeting, we have a detailed template you can download from Etsy, as well as some free resources and tools.
Emergency Fund Establishment
This is crucial for your financial security. Having an emergency fund means you won’t go broke if you suddenly lose your job or need medical care.
Aim to save at least three to six months' worth of living expenses. This should give you a decent cushion in an emergency. Your emergency fund should be easily accessible and kept separate from your other savings or investment accounts.
Debt Management Strategies
Debt repayments can significantly eat into the amount of money you can put toward your financial goals. Develop a strategy to manage and pay down your debt. Consider methods like the debt avalanche or snowball techniques:
Debt Avalanche: Pay extra on the debt with the highest interest rate while making minimum payments on the rest.
Debt Snowball: Pay off your smallest debts first to build momentum, regardless of interest rates.
By reducing your debt, you'll alleviate financial stress and improve your overall financial health.
If you need help managing your debt, we’ve got loads of resources and tools to help you.
Building a Strong Credit Foundation
Maintaining a strong credit score can influence your ability to obtain loans at favorable interest rates, impact employment opportunities, and affect your insurance premiums. If getting a mortgage was one of your financial goals, then you’ll certainly benefit from improving your credit score.
To build and maintain good credit, always pay your bills on time, keep credit card balances low, and avoid opening excessive new accounts. Regularly monitoring your credit report will help you catch and address any inaccuracies or fraudulent activities early on.
Investment Strategies
Saving money is great, but a sound investment strategy could see you generate returns on it. Profiting from investing and compounding your returns could make a huge difference to when you achieve your financial goals.
Asset Allocation and Diversification
Your portfolio’s asset allocation should align with your investment goals and timeline. It involves dividing your investments among various asset categories, such as stocks, bonds, and cash. Diversification, on the other hand, entails spreading your investments within each asset category. Here’s a simple breakdown:
Stocks: Growth-oriented but higher risk
Bonds: Provide steady income, generally less risk than stocks
Cash: Offers liquidity, with minimal risk
Rebalancing your portfolio periodically is crucial to maintain the desired asset mix as markets fluctuate and your priorities change. This may involve selling some investments and purchasing others to get back to your target allocation.
Retirement Accounts Management
When it comes to retirement accounts like an IRA, Roth IRA, and traditional IRAs, make informed decisions:
Traditional IRA: Funds are taxed at withdrawal
Roth IRA: Contributions are after-tax; withdrawals typically tax-free
Maximize your contributions to take advantage of tax benefits. For example, the contribution limit for IRAs for individuals 50 or older is higher, providing a catch-up opportunity.
Consider your goals, timeline, and experience when making decisions about your retirement account. If you’re a skilled investor, you might want to manage your retirement account yourself. For other people, it’s usually wiser to have an expert manage your investments for you.
Your timeline for retirement could also impact your asset allocation. For example, if you’re decades away from retirement, it could make sense to hold stocks and focus on growth seeing as short-term volatility isn’t important. Those who are approaching retirement, however, will likely want to pivot into lower-risk, less volatile assets.
Understanding Risk Tolerance
Risk tolerance is about how much market volatility you can comfortably endure. Acknowledge your personal comfort with risk and adjust your investment strategy accordingly.
Conservative: Might lean toward bonds and cash
Aggressive: More likely to hold a larger portion in stocks
Consider how market changes could affect your investments and whether you’re positioned to handle potential downturns. Regularly assess your risk tolerance to ensure it matches your current financial situation and retirement timeline.
Retirement Planning
Don’t leave retirement planning until it’s too late. It’s never too early to start planning for your retirement, and the sooner you do, the more comfortable you’ll be in later life.
Retirement Account Types
Your choice of retirement accounts is pivotal in maximizing your savings potential.
Traditional IRAs and 401(k)s allow for tax-deferred growth, meaning you pay taxes upon withdrawal.
Roth IRAs and Roth 401(k)s offer tax-free growth, with taxes paid on contributions upfront.
SEP IRA or Solo 401(k) might be suitable for self-employed people, offering higher contribution limits.
If you’re not sure which type of retirement plan is best for you, you can crunch the numbers with our free Roth 401k vs Traditional 401k retirement calculator.
Retirement Savings Techniques
Make sure you’re doing everything you can to make the most out of your retirement savings.
Automating contributions to your retirement accounts can help you stay consistent and potentially allow your savings to grow more over time due to compounding interest—the interest on your interest.
Aim to contribute at least enough to get any employer match offered, as this is essentially free money.
Catch-up contributions are especially advantageous for those over 50, as they allow higher investment limits.
Long-Term Care Considerations
As life expectancy increases, so does the potential need for long-term care. Incorporating long-term care insurance into your retirement plan can help protect your nest egg from high care costs. When selecting long-term care insurance, consider the policy's benefit periods, coverage amount, and inflation protection to ensure it fits your potential needs.
Tax Considerations
Death and taxes may be the only certainties in life, but being financially prepared can make them less scary.
When it comes to managing your financial strategy, being aware of tax considerations is critical. Your actions can influence your tax liability for the year, so it’s important to have an informed approach to tax planning and making contributions within legal limits.
Tax Planning and Deductions
Identify potential deductions to lower your taxable income. You can make contributions to retirement accounts, which may be tax-deductible up to certain limits.
401(k) Contribution Limits for 2024:
$23,000
Catch-up Contribution (if 50 or older): $7,500
IRA Contribution Limits for 2024:
Traditional or Roth IRA: $7,000
Catch-Up Contribution (if 50 or older): $1,000
SEP IRA Contribution Limits for 2024:
Up to 25% of your compensation
Remember to investigate itemizing deductions if they exceed the standard deduction, which can include mortgage interest, state taxes, and charitable donations.
Reviewing Tax Accounts
Review your tax accounts to ensure all withholdings and estimated payments are accurate for the tax year. Adjust your W-4 form with your employer if necessary to avoid owing a large sum or overpaying. If you have multiple income streams, make sure that you are setting aside enough to cover your anticipated tax liability.
Check Withholding Levels:
Main employment income
Side business or freelance work
Investment income
Correctly managing withholding will help you avoid penalties for underpayment when tax time arrives.
Contributions and Limits
Making contributions to tax-advantaged accounts can not only reduce your tax liability but also enhance your financial strategy. For example, contributing to a Health Savings Account (HSA) can offer triple tax benefits: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are not taxed.
2024 HSA Contribution Limits:
Individual coverage: $4,150
Family coverage: $8,300
In addition to HSAs, consider making a non-deductible Roth IRA contribution, which offers tax-free growth and tax-free withdrawals in retirement. However, keep in mind the income limitations that may affect your eligibility to contribute directly to a Roth IRA.
Insurance and Protection
Paying for insurance now could save you a huge amount of money in the future, so it’s vital that you include it in your financial planning.
Life and Disability Insurance
Life Insurance: This ensures that in the event of your passing, your dependents will be provided for. Think about factors such as your current income, debts, and future obligations (like college funds) when choosing coverage levels.
Term Life Insurance: Offers protection for a specific period.
Permanent Life Insurance: Includes whole life and universal life, and offers protection plus a cash value component.
Disability Insurance: This protects your income if you're unable to work due to illness or injury.
Short-Term Disability: Typically covers a percentage of your salary for a short period post-injury.
Long-Term Disability: Provides a benefit for a longer period, possibly until retirement age.
Assessing Insurance Needs
To assess your insurance needs:
Calculate your long-term financial commitments.
Estimate ongoing living expenses for your dependents.
Factor in any existing savings or investments.
Considerations:
Life-changing events (marriage, parenthood) may alter your insurance needs.
Your profession and lifestyle can impact the level and type of coverage required.
Policy Review and Updates
Regularly Review Your Policies: Circumstances change, and so should your insurance. Annual reviews ensure your insurance keeps pace with your life.
Update Accordingly:
If your income increases, consider higher coverage to match your standard of living.
Changes in tax laws or insurance regulations might affect the relevance of your policies.
Services:
Consult with insurance experts for product recommendations.
Use online services to compare policy terms and costs.
By carefully managing your insurance portfolio, you're taking concrete steps to safeguard your financial well-being. Remember, protection through insurance is not a one-time task but an ongoing process that demands your attention as your life evolves.
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Estate Planning Essentials
The final part of your financial plan should be considering what would happen to your money if you passed away. If you want your loved ones to be taken care of, that’s something you need to plan for well in advance.
Estate Planning Documents
To secure your financial legacy, you'll need to gather and prepare several key estate planning documents.
Your will is the cornerstone, specifying asset distribution and guardianship of minors. A trust can provide additional control and privacy, while a durable power of attorney allows a trusted person to manage your affairs if you're incapacitated. Don’t forget a healthcare directive to state your medical preferences.
Essential Documents Checklist:
Will
Trust (if needed)
Durable Power of Attorney
Healthcare Directive (Living Will)
Beneficiaries and Wills
Regularly updating your list of beneficiaries is paramount to ensure your assets are distributed as you intend. On accounts like life insurance or retirement plans, beneficiaries must be explicitly named. Additionally, your will must be clear, valid, and up-to-date, reflecting any major life changes such as marriage, divorce, or the birth of a child.
Beneficiaries Checklist:
Name beneficiaries on all accounts
Review and adjust after life changes
Ensure your will is current and enforceable
Charitable Giving
If you wish to include philanthropic gestures within your estate plan, consider using bequests in your will or setting up a charitable trust. This can provide tax benefits to your estate and ensure your legacy includes support for causes important to you.
Charitable Planning Options:
Bequests in will
Charitable trusts
Donor-advised funds
Remember that estate planning is an ongoing process, and reviewing your plan periodically with legal or financial professionals is highly recommended.
Review and Adjust Financial Plan
Financial planning isn’t something you can just do once and then forget about. Limits and laws change, as will your income, expenses, family life, and priorities. This is why it’s important to regularly adjust your financial plan to account for any changes.
Annual Financial Review
It’s good to review your plans at least once a year to keep them up to date. At the year-end financial assessment, focus on:
Portfolio Balancing: Revisit your investments to ensure they align with your risk tolerance and financial goals.
Credit Score Check: Maintain a healthy credit score by checking it annually and correcting any discrepancies.
Retirement Savings: Maximize your retirement plans to match your future needs and current fiscal policies.
Adapting to Changing Circumstances
Life is unpredictable, and your financial plan should be adaptable:
Income Changes: Adjust your savings and investment strategies with any significant changes in your income.
Life Events: Marriage, the birth of a child, or a career switch can impact your financial objectives.
Market Fluctuations: Respond to economic shifts with a flexible approach to protect and grow your assets.
Working with Financial Professionals
There’s a lot to consider when doing financial planning. If you’re not comfortable with all of it, you might want to get some expert help.
Collaborative Approach: A financial professional offers valuable insights, helping you navigate complex financial waters.
Customized Guidance: Working with a financial planner ensures personalized strategies that fit your unique situation.
Regular Updates: Schedule periodic meetings to keep your financial professional informed and your plan current.
Regularly reviewing and revising your financial plan keeps you ahead in achieving your financial aspirations.
The Bottom Line
Making a detailed financial plan may be daunting, but it’s the only way to ensure you’re financially prepared for whatever life throws your way.
If you want to save and make money in the long run, use our free Financial Planning Checklist to make sure you’re on the right track.
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