8 steps to a flexible financial plan

So what are yours? A few questions might help.

What do you want your money to do for you?

Your answer is connected to what’s important to you—now and down the road. Do you want to pay for your kids’ college educations? Help a family member? Start a business? Retire early (or late)? These things are goals.

Write them down. Don’t worry about prioritizing just yet.

Categorize each goal as short-, mid-, or long-term.

This will give you a deadline for fully funding your goal. Here's a guide:

• Short term goals: Six months to five years
• Mid-term goals: Five to 10 years
• Long-term goals: More than 10 years

Prioritize each goal as critical, need, or want.

Prioritizing tells you what to fund first. When you label each goal critical, need, or want, you're figuring out the order in which they need attention.

Let's say you have a short-term goal to build up your emergency fund, and it's "critical." If another short-term goal is to get a nicer car when your current car works just fine, that's a "want."

Next step:

Sound daunting? Taking it one step at a time will help create a clear path forward. And less stress.

5 steps to setting your financial goals

 
 

Track your expenses.

Find out where your money goes each month. Categorize your spending. Housing, for example, would include your mortgage/rent, homeowner’s/renter’s insurance, property taxes, maintenance, and repairs. Other categories could include clothing, retirement savings, loans, food, transportation, utilities, entertainment—things like that.

You can refer to the last few months of bank and credit statements to speed up this task.

Add up your income.

Write down your total monthly take-home pay. If you have a spouse or partner whose income you share, include that, too.

Figure the difference.

Subtract your monthly expenses from your monthly income. If there’s money left over, you’re in good shape. You have money to put toward your first and most critical goal.

Make up any shortfall.

Spending more than you make? Don’t panic. Here are some ways to fix that:

• Cut back on non-essential spending.
• Find a side hustle to bring in extra income.
• Look for better deals on things like cable TV, car insurance, homeowners/renter's insurance, and other regular paid services.

You don’t necessarily have to make huge cuts in your spending. (Unless you want to—then more power to you!) Even small adjustments can add up over time.

How much you could save

Discretionary expenses	Monthly	Total/year
Gym membership	$100	$1,200
Cable bill	$100	$1,200
Takeout 3x/week	$120	$1,440
		$3,840/year

You may be willing to trim back some expenses but not others. Look for tradeoffs you can stick with over time. That’s the trick to staying within your budget.

Next step:

So you’ve set your financial goals. Now look at your budget to see if you can find more money to put toward those goals.

Budgeting to help fund your financial goals

 
 

How much to save

A rule of thumb for your emergency fund is three to six months of essential living expenses. That number can vary based on your life. If you have a lot of expenses or your family has one breadwinner, you may need to save more.

If saving that amount seems overwhelming, start smaller. If you have nothing set aside for emergencies, for instance, try to save one month of expenses. Then build from there.

Keep your savings accessible.

Your emergency fund should be available when you need it. You don’t want it to go up and down with the markets. Consider a low-risk, highly liquid account—like a savings account. The account should be easy for you to get to—but not so easy that you’ll be tempted to use it for non-emergencies.

Building an emergency fund

Initial amount	$5,000
Monthly deposit	$250
After five years	20,628

Based on 1.0% APY in 2019. Interest rates vary. For illustrative purposes only.

The account should be easy for you to get to—but not so easy that you’ll be tempted to use it for non-emergencies.

Use—and replenish—as needed.

When you have an “Oh, shoot” moment, pull from your emergency fund if needed. That’s what it’s there for. Just make sure to build up the account again as soon as possible.

Next step:

Would a $500 expense throw off your budget in a big way? If the answer is yes, consider establishing an emergency fund.

Why you need an emergency fund and how much you need

 
 

Disability insurance: Keep your income coming in.

Disability insurance helps protect your income if you get sick or hurt and can’t work. Keep reading for some navigational tips.

Learn the lingo.

This will help you make an informed decision about buying disability insurance. A little extra vocabulary goes a long way.

• Underwriting: Guidelines an insurance company follows to see if you qualify for income protection, how much you can buy, and what it’ll cost.
• Premium: What you pay for coverage while you’re healthy and working.
• Elimination period: A “waiting period” before receiving monthly payments if you become too sick or hurt to work.
• Benefit payment and period: How much money you receive from your policy, and for how long.
• Rider: A feature you can add to your policy to enhance benefits, which may have additional costs.
• Claim: Communicating—with paperwork by you and your doctor—a disability to an insurance company.

Find out what your employer offers.

You may have short-term and/or long-term disability insurance through your job. If you do, find out how much of your income it replaces—and for how long.

Usually, this kind of coverage will replace about 60% of your income. After taxes, though, that may only leave you with 40–50% of your income. It may not be enough. That’s where an individual disability policy can help.

Life insurance: Protect your family.

Life insurance can help your family pay off debt and maintain their lifestyle if you pass away. It can also help fund the kids’ college education and more.

You may also have life insurance through your job. But like disability insurance, the life insurance your employer offers might not be enough.

An individual life insurance policy could fill the gap between what you need and what any employer policy covers. And it stays with you—even if you change jobs. Do you need this kind of coverage? This is the type of question you can ask a financial professional.

Next step:

Do you have enough insurance to help protect your paycheck and family? Use our disability income calculator to help you find out.

3 steps to make sure you’re covered

 
 

Credit card debt, on the other hand, leads to the opposite of financial progress. Monthly interest snowballs quickly, which just puts you deeper into debt.

Pay expensive debt first.

Start by targeting the debt with the highest interest rate—that’s your hottest debt and should be your priority. Pay as much as you can every month. Make sure those extra payments go toward the principal (the money you borrowed)—not the interest. That way you’re paying off your actual debt, instead of just the interest.

Once that’s paid, move on to the next debt using the same strategy.

Should you consolidate?

If you have a lot of credit card debt, you might think about debt consolidation (rolling it all into one loan). Consolidation may make paying your debts simpler. But it doesn’t necessarily mean you’ll save money.

First, review what got you into debt. If it was a budgeting issue, fix those spending habits. Otherwise, you’ll never break that debt cycle.

Then, understand the total costs of any debt consolidation before you sign on the dotted line to consolidate debt. Ask lots of questions. And explore other options first.

Next step:

Debt is a fact of life. Find the right balance and manage it using a method that works for you.

Managing debt: 3 ways to find the right balance

 
 

Why the urgency? These days, most people have to fund their own retirement.

The sooner you start, the more potential your money has to grow over time. It’s all about compound earnings—when your money earns more money.

Let’s say you invest $10,000. And you earn 5% over a year. So now you have $10,500. Over the coming year, you make 5% not just on your initial $10,000 but also on the $500 you earned last year. That’s compound earnings.

Take a look at the graph below. It shows how starting early could make a big difference in your nest egg at retirement.

The power of starting early

Assumes $400 saved every month with a 6% annual return. The assumed rates of return in this chart are hypothetical and don’t guarantee any future returns nor represent the returns of any particular investment. Amounts shown do not reflect the impact of fees, taxes, or expenses. This is for illustrative purposes only.

How much should you save?

Most experts say at least 10% of your income should go toward retirement. If you’ve started saving late in life, you may need more than that.

If that just isn’t possible right now, that’s OK. Save what you can and commit to increasing 1% every year until you can hit the mark. Try to save enough to get your employer’s matching contribution (if they offer one) so you don’t leave any money on the table.

Tax benefits

Another perk of saving in a retirement plan—like a 401(k)—is the tax benefit.

With a traditional 401(k) or 403(b) (or a similar retirement plan), you generally won’t pay taxes on the money you put in the plan until you take it out at retirement.

For plans that allow Roth contributions, you pay taxes up front—not when you withdraw funds—as long as you meet distribution requirements.

How much can you contribute in 2021?

Type of plan	2021 limit	Catch up limit (Age 50 or older)
Workplace plans [such as 401(k)s or 403(b)s]	$19,500	$6,500
IRAs	$6,000	$1,000

Source: IRS.gov | Workplace plan limits may be lower.

(Relatively) painless retirement savings tips

Make it automatic. Contributions to your employer’s retirement plan can come straight out of your paycheck. Your employer’s plan may even let you automatically increase your contributions every year.

Put your raises to work for you. If you get a raise, increase your retirement contributions, too. That way you won’t miss the extra money.

Take advantage of debt payoffs. Focusing on paying off debts? When you’ve cleared them, put that payment money toward your retirement savings.

Max it out. If you really want to boost your retirement savings, know how much you can save in a retirement plan.

The shift from saving to spending

Once you move into retirement, you’ll shift to spending that money you’ve saved.

• Determine what you’ll spend each month in retirement.
• Identify how much money you’ll have coming in, and from where. Some can be guaranteed income, like Social Security or an annuity. Some can be variable, like a 401(k), depending on what you’ve saved.
• Match what’s coming in with your expenses.
• If you’re off, reach out. A financial professional can help you plan how to fill the gaps.

Next step:

Even if it’s a long way off, saving and planning for retirement is a good idea. Even if it’s a long way off, saving and planning for retirement is a good idea. Our Retirement Wellness Planner can help you see how small changes can add up over time.

5 steps to creating your retirement plan

 
 

Saving is like a bicycle. It’s convenient and fairly safe if you stay in the bike lane close to home. But there are places that a bike just won’t get you.

Sure, you could ride your bike to South America (i.e. use a savings account for retirement). But it’ll take way too long and you’ll likely never get there. You need alternative forms of transport.

For longer-term goals, you’re going to need something with an engine. That’s what investing does: takes your saving strategy and puts an engine behind it.

Thinking about where you are in life will help determine your investing approach.

• How long do you have until you need the money?
• What’s going on in your life?
• How do you feel about risk? (Use this questionnaire (PDF) to find out.)

Then take those insights and apply it to some basic investing concepts.

Stocks, bonds, and other investments

What’s the difference between common types of investments? A lot of it centers around risk versus return.

In general, the higher the potential for return (a gain or loss on investment) the higher the potential for risk of loss—and vice versa. Check out the graphic below.

Mix it up.

Choosing a mix of investments from various asset classes also helps manage risk. That’s because some kinds of investments tend to increase in value while others decrease.

For instance, stocks and bonds tend to move in opposite directions. If the value of your stock funds goes down, the value of your bond funds may increase.

It’s also a good idea to choose a mix of different funds within each asset class. Within your stock investments, you could choose some lower-risk stock funds and some higher-risk stock funds. This can help you balance the ups-and-downs of the market. This strategy is called diversification.** And over long periods, it might help you get a more consistent return.

Adjust over time.

As you get closer to retirement or another goal, you may want to adjust your mix of investments. In general, it’s good to have less risk as you get closer to your “end goal.”

That’s because if the market drops, you have less time to recover from losses. Giving up some potential for growth might be worth it in exchange for lower risk.

It’s also a good idea to rebalance (PDF) your portfolio regularly. Over time, some investments may grow more than others. After a while, your mix of investments isn’t the same as when you started. That could mean your money is taking on more risk (or less) than you originally intended.

Rebalancing once a year takes everything back to your original mix. Most financial institutions can help you do this easily. Some can do it automatically for you.

Mutual funds or pooled investments can help make it easier.

We all hear about people “making it big” on individual stocks. But it’s also easy to lose money on individual stocks—or any single investment. It may be intimidating to think about researching and picking stocks or investments with the pressure of potentially losing your hard-earned money.

Mutual funds and other commingled vehicles include a variety of investment types. That helps to reduce risk.

Investment pros (portfolio managers) with special training and tools manage mutual funds. That means you don’t have to worry about the everyday decisions involved in picking individual investments within a mutual fund. And in some types of funds, the managers even adjust the mix of investments over time to help you stay on track to reach your goals.

Next step:

You’re already an “investor” if you contribute to your 401(k). But if you’re ready to venture beyond saving/investing in a retirement plan, the link below gives you three steps to get started.

Ready to invest some of your savings?

 
 

You need a will if you:

• have family, friends, or a cause you want to support
• want control over who gets what (and who doesn’t)
• have kids who’ll need a guardian
• would like to minimize taxes and fees on your estate

If you die without a will, the state you live in makes these and other decisions. It can take a long time to process. And the fees can add up quickly. This can be a lot to handle for the people you love.

Designate powers of attorney.

What if you’re in a serious accident and, for a while at least, can’t make decisions for yourself? Do you want a doctor or judge to choose who can make your medical, financial, and other decisions? Or do you want to spell out your wishes ahead of time?

Fairly simple legal documents can help you stay in control. Durable power of attorney and health care power of attorney are the most common. An Advance Directive, or “living will,” is a guide for doctors and caregivers to know your wishes for end-of-life-care.

You can work with an attorney to set up these documents.

Keep the estate plan up-to-date.

It’s easy to create an estate plan and then cross it off your list. But as life changes, your estate plan should change, too.

Review your plan every year or two, or any time you have a major life change, like a marriage or divorce, kids leaving home, or extended family moving in with you.

Next step:

You don’t have to be wealthy or old or married or a parent to need an estate plan. Learn how to create your plan, and the four key documents you need.

Who needs an estate plan? Probably you