"A goal without a plan is just a wish"
Antoine de Saint-Exupery
Planning for one's financial future is a straightforward exercise, but one in which the nuances can dramatically change the outcome. When you start on the path ahead, you have the option to change direction as you move along toward your goal. If you don't start, as is the case more often than not, you have no options other than struggling to deal with unforeseen consequences, which may well be less than desirable.
A financial plan has four main elements: what you own (your assets), what you owe (your debts), how much you are earning (your income), and how much you are spending (your expenses). If your assets are greater than your debts and your income over time exceeds your expenses, assuming nothing untoward happens, you're probably in good shape.
But a plan is based upon assumptions that may or may not be on target. Among these are the rate of inflation, the rate of investment returns, and the expected date of retirement, i.e., when earned income stops and the income flow is dependent upon investments, Social Security, and pensions, if any.
In the absence of problematical events, it's entirely possible that the path will be smooth. Even so, things change and that's the rub.
If inflation rises substantially, but investment returns do not follow suit, you may have to withdraw from your assets, which may wither away slowly rather than rising. Or if health issues arise and you are unable to continue working until the planned retirement age, that, too, will be disruptive.
Far worse would be a situation involving the need for long-term care, either at home or in a facility. Should this occur, unplanned expenses could soar. Many of us will need long-term care of some sort and it's likely that one out of three will require care at a nursing facility. That's not a pleasant prospect, but it's one for which insurance is available. Long-term care insurance, however, if available, is extremely costly.
When you have children, there's usually the matter of saving for their education. For a baby born today, the four-year cost of a private university could easily be $500,000 when they're ready to attend. At a public university, figure half that.
If one's plan includes leaving an inheritance for the generations to follow, there's all the more reason to make efforts to limit the need to draw down funds from your saved assets.
Oh yes, and let's not forget about things like wills, powers of attorney, and health care proxies, all of which need to be take care of.
A financial plan is not about getting rich, and you don't have to be rich to create one. It's about doing more with what you have.
And sleeping well at night.
N. Russell Wayne, CFP®