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When I graduated from college my Mom’s advice for my first foray into the real world was:
- “Maybe you should get better at taking constructive criticism”, and
- “Don’t forget to save 20%”
I worked on number one for years (I now don’t feel like a wounded bird when someone has something negative to say). And I dutifully followed number two. But it always threw me for a bit of a loop. I had so many questions, that I couldn’t find a definitive answer for:
- Is 20% before or after tax?
- Does that include what I save in my 401(k)?
- Does that include saving for a vacation or a down payment on a home?
- Is it really 20%. Why not 15%? I heard someone say 10% once…
What it took me years to realize is that these general savings rules are there just to get you started. It’s your personal finance starter package and eventually, you’re supposed to graduate to the full, personalized version.
So how much should you save?
And invest. And spend.
And when can you retire? And can you make a career change? Take the family on summer vacation? If 20% isn’t always right, what is?
Enter: the financial plan
I know what you’re thinking: Oh god, a financial plan sounds really serious and really time-consuming. I’ll just stick to my 20% as a good guess.
That’s certainly what I was thinking the first time I decided to figure out if 20% was the right number.
But think of it this way: a financial plan is just how you take your vision for your ideal life and put it into numbers. A financial plan isn’t just a budget and it’s not just your investments. It’s what can take you from where you are to where you want to be with the least resistance possible (while protecting you from things that can derail you along the way).
A full financial plan includes:
- Your life planning vision (the most important part, IMO)
- Cash flow (your budget, aka a spending plan)
- Retirement plan (for whenever you want that to be)
- College planning (because it’s not cheap)
- Investments (do you have the right mix?)
- Risk management (how can you protect your plan)
- Estate planning (the legal way to make sure your money goes to who you want it to)
- Tax planning (because those rules are a lot)
Does your financial plan need to include all of those? Honestly, it depends where you are. If you’re mid-career, you have a couple of kids, a mortgage, etc, you probably want a full financial plan that includes all that.
But financial plans aren’t an all or nothing proposition. Start with a life planning vision and a spending plan. Then, when you want to figure out if the money is coming together to support your vision, take a look at your longer-term financial picture so you can ditch the 20% rule for something that’s a little more custom.
You can DIY or hire a financial planner.
If you go the DIY route, I recommend reading Life Planning For You followed by The One Page Financial Plan. And then using a free planning tool like Personal Capital or Wealthfront to do the number crunching for you. (note: I’m only referencing the free financial planning tools both sites offer, not the investment services).
If you decide to hire someone, it’s good to find a fee-only fiduciary. That means they won’t get a commission for selling you products and they’re legally required to act in your best interest.
How to do your own calculation
Whatever calculator you decide to use, this is the basic idea:
- How much do I have saved and invested?
- How much am I currently saving?
- What are the things that I want (vacation, home, career change, retirement, etc)?
- Calculation crunches
- Am I saving enough to get me there?
If yes, that’s pretty amazing.
If no, how much do you need to save to get there? And can you save more or make more to make that happen?
Just remember: you can make changes. Just because your calculation didn’t work out the first time and you realize that you’re not saving enough for your goals, that doesn’t mean hope is lost.
How we took our life plan to a financial plan
Because Jordan and I enjoy the DIY route, we decided to do the semi-DIY route with our updated financial plan. As much as we love spreadsheets, we also love using online tools to shortcut our calculations. We have limited time to do this and we wanted it to be simple.
I’m going to walk you through how we planned the first 4 things on the financial planning list. For risk management, next week I’m sharing more about our life insurance plan, but we still have a little more to do in that category. And we went to a lawyer for our estate plan, because I had no idea how to DIY that part.
Before we get into the how we did it, just know this: you’re planning scenarios. If at first your plan is way off and you realize you’re not saving enough, that’s ok. We were there. But we kept playing with the calculator until we could figure out how to make it all work.
This was all started when we discovered financial life planning and read George Kinder’s Life Planning For You. Jordan and I went through our whole process in this post. It was great. Life-changing even. And we came up with a few goals: moving to Hawaii, growing our content marketing business, prioritizing health and time with family, and making better environmental decisions.
These all have an impact on our money:
- To move to Hawaii we need a move fund (moving is expensive)
- To grow the business we need a safety net (for those months when things may not go well) and to spend more in childcare
- To prioritize health for us meant eating whole, fresh food and working out consistently
- Spending time with family means funding flights home to visit and time away from work
- Being better to the environment can mean a lot of different things, but we’re trying to reduce our waste and eat more sustainably.
For all of these, we came up with a dollar value. And after we came up with the dollar value we put this to the side for a few weeks because it was a little intimidating.
But it got better.
Cash Flow, retirement, and college savings
Because we use an automatic budget, we know how much we save and invest each month and how much we spend. Was that enough to fund our life planning goals and our retirement?
Not quite. But that’s ok — this is where we ditched the 20% estimate. We figured out where we need to make changes and saw how the small changes we make each month get us closer to the life that we want right now.
Here’s how we did that.
We use Personal Capital’s free financial planning tool. I did a video tutorial on how to use it, which you can watch here. We don’t use their investment services. Our bank accounts, investment accounts, retirement accounts, and mortgage are all already linked so it was easy to get started.
- We entered how much we’re currently saving each month.
- We entered how much we’ll need in six months to make the move.
- We entered how much we plan to save for retirement each year going forward.
- Personal Capital calculated how close we are to making our goals.
The calculation told us if we could still retire and do all of these other things we wanted to, based on how much we were saving.
If a calculator could laugh at you over the internet, this calculator would’ve laughed at my first plan.
I kept adjusting the numbers: what if we saved a little more during these next six months. Would that help? What if we kicked our retirement savings up by a few percentages?
I played around with the calculator until I landed on a plan that worked. We have to save pretty aggressively over the next six months, we need to earn a little more in our business, but we got to a place where the numbers were do-able. We can make this life change and still retire someday.
I know your life plan isn’t to move to Hawaii. Maybe it’s to go back to school, switch careers, move to a part-time schedule, save up for a house, or take an annual vacation without using your credit card.
This tool will tell you if you’re saving enough for those things and for retirement. No more using a general rule: you get specifics. Can you save for tomorrow and still do the things that you want today? If not, what do you need to adjust right now to get there? I love this tool because it shows you how to balance.
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