Do you let your shoebox overflow with bills before sitting down and grappling with your finances? Now that we have apps and online calculators to do most of the organising, prioritising and number crunching for us, Do-it-Yourself (DIY) financial planning has never been easier.
Spend an hour or two now developing your DIY financial planner, and then spend as little as 15 minutes a week managing your finances. Let’s get started.
DIY Financial Planning#1: Determine Your Net Worth
Before working on your financial goals, take a snapshot of your financial worth today. Add up all your assets and subtract your liabilities to get your net worth. Do not sweat the small stuff. If you forget your daily $5 latte from Starbucks, that’s fine. You can always update it.
Assets are what you own – house, car, stocks, bonds, savings
Liabilities are what you owe – Car payments, mortgage, credit card bills
This Net Worth calculator is one of many calculators we will use from the Singapore government’s MoneySense website. You may also access financial planning calculators, via apps, and in financial planning software such as Intuit.
DIY Financial Planning#2: Do Your Budget
Your personal budget is one of the most important calculations you will make. The first step is calculating what you earn from all sources minus what you spend, your expenses, with a Budget calculator. Decide on a budget allocation. MSN Money proposes the 60% Solution: 60% is allocated to fixed expenses, and 10% each to irregular expenses, long-term savings/debt, retirement and fun money.
A budget is meant to provide a financial spending guideline. The better you are at staying within your budget, the more you will save for retirement. You may also develop special purpose budgets.
If, for example, you decide to return to graduate school for one year, your budget will change as you add tuition, books and other expenses while reducing your income. Or perhaps you are saving for a down payment on a condo so for the next two years, you plan to cut out unnecessary expenses.
A budget continuously changes. You may get a raise, decide to buy a more expensive car, or sign up for singing lessons on a whim. Set aside a specific time weekly or monthly to review your budget. Why not spend a few minutes on the subway train ride in from work and review and update your budget on a financial app on your smartphone once a week/month, or as needed.
DIY Financial Planning#3: Pay Off Debt
Pay off credit cards starting with those with the highest interest rate. Consider consolidating your credit cards, auto loans and other debts to negotiate a cheaper interest rate payment. This Personal Debt Consolidation Calculator will give you an idea of the savings you can achieve.
DIY Financial Planning#4: Save More Money
If you are the average millennial saving 7 percent of your income, you will need to increase this to 10-20 percent if you want to maintain your current level of consumption in retirement. Start cutting back on unnecessary expenses. Stop throwing away your money on rampant consumerism.
Many billionaires are frugal and do not buy new cars and gadgets until the old ones wear out. $50 a week saved today and put into savings bonds with a 4% interest rate will be worth over a quarter million dollars in 40 years when you are ready to retire. Play with different scenarios with the Goal Savings calculator.
Ensure you have an emergency fund of at least 3 to 6 months’ salary in case of an accident, illness, or job loss.
DIY Financial Planning#5: Buy Insurance
Review the insurance plan from your employer. Ensure you have insurance on all valuable assets: home, household contents, auto, and so on. You will also need health, disability and long-term health care insurance. If you wait until you are 50 to buy long-term care insurance, your premiums will be much higher and cut into your retirement savings. Over 60, you may find it difficult to obtain such insurance.
DIY Financial Planning#6: Taxes
Taxes no longer have to take a lot of your time. If you keep your virtual shoebox in order and file electronically, taxes can be quick and simple. If your taxes are complex, consult a tax specialist.
DIY Financial Planning#7: Retirement Planning
Review the retirement plan offered by your employer. Most employees will need to top up their plans. Determine how much money you will need to retire and maintain your current consumption levels. The MSN Retirement Planner calculator is one of many tools available online to help you determine your retirement savings needs. Once you have determined how much you need to save each year, divide it by 12, and add the amount to your monthly budget. How many lattés will you have to cut out?
Try our Retirement Calculator.
Next, you need to decide how to invest your retirement savings. First, determine your risk profile. Your investment advisor can help you, or use one of the many online tools offered by investment advisors. Once you better understand how much risk you can take, you are ready to start choosing retirement investment options.
If you have a work plan, you will want to determine how much of a gap in retirement savings you will have if you want to maintain your current consumption habits. If, for example, your payout will be $3,000 a month and you require $3,500, you may want to start investing in an annuity that will start paying out $500 a month once you turn 62.
Many online tools found on investment advisor websites can produce hypothetical portfolios for you. Talk to your investment advisor for further guidance.
Good work! You have now built your own DIY Financial Plan. Now relax and let it do all the tedious budgeting, accounting and investing tasks for you.
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