4 Key Pillars to Help Build a Solid Financial Plan
Published: February 2016
If developing a financial plan feels like an overwhelming task, you're not alone. Many people put off dealing with their personal finances simply because they have no idea where to start: Should I max out my retirement plan or spring for life insurance? Save for a house or sock away money for my toddler's college years? Decisions, decisions!
To make the planning process simpler, it may help to break down financial tasks into easily achievable steps. Consider the following:
Budget and Save
Managing your current income and monthly living expenses is a cornerstone of your financial life. "To-do" tasks here may include:
Creating an emergency fund. An emergency fund may help you avoid racking up debt if the unexpected happens — for example, if you end up in the emergency room or your car transmission blows out. Some experts recommend saving three to six months' worth of living expenses.
Saving for short-term goals.
Beyond budgeting for monthly bills, you might want to plan for larger expenditures in the near future. Depending on your situation, your short-term financial goal might be saving for a down payment on a house, getting married or planning for a family. Saving for these events now may help you avoid breaking the bank when the big day comes!
Protect What's Most Important
As you get established in your job and personal life, you might begin to think about protecting your loved ones, and the things you own, from the unexpected.
Your family. If you have a spouse, children or other family members who depend on your income, you may want to consider life insurance. If you pass away, it's intended to help provide money that could be used to replace income. A life insurance agent can help you compare term or permanent policies so you can decide which makes sense for your family.
It can be hard to think about, but how would you pay for care if you developed a medical condition that made it difficult to care for yourself? Long-term care insurance is one option to consider. It may help pay for health care services or personal care services in your home, or in an adult day care, assisted living, nursing home or rehabilitation facility.
Your car. Liability car insurance coverage is required by law in most states. You may be able to purchase additional coverage, however, to help protect your car -- and your finances -- against damages. Check with your agent to see which coverage options are available on your policy.
Homeowners insurance helps protect your home's physical structure from damage due to a covered peril. This insurance also typically includes personal property coverage (for your furniture, clothing, electronics and other belongings) and liability coverage in case someone is injured while visiting your home.
Invest for Future Needs
Planning for long-term financial goals is also a key building block of your financial plan. For some, these objectives may include investing for retirement and for their kids' college educations. Investment options may include the following:
Mutual Funds. Mutual funds allow you to purchase shares of a diversified fund. These funds are often what your money is invested in when you participate in 529 savings plans, workplace retirement plans and IRAs.
529 College Plans.
These come in two options: Prepaid tuition and savings plans. Prepaid plans allow you to pay a portion or all of your children's tuition in advance, usually at current prices. Savings plans allow you to invest money on a tax-advantaged basis in mutual or money market funds. You can later withdraw the funds to help pay for qualified college expenses.
Individual Retirement Accounts, or IRAs
. Traditional, Roth and rollover IRAs all allow you to invest in tax-advantaged savings for the future.
These retirement plans are typically offered by employers. You may be able to have money withdrawn directly from your paycheck and invested into a traditional 401(k) plan on a tax-deferred basis — meaning you usually don't pay taxes on the money until you withdraw it during retirement. In addition, some employers contribute money to the plan on your behalf.
You may need to adjust your investment strategy as your retirement years grow nearer to help make sure your investments and savings last as long as you do. Talk to your financial advisor and use savings calculators to help determine how to make your money work harder. Typical retirement income sources — in addition to your personal retirement investments — may include:
Social Security benefits. According to the Social Security Administration, nine out of 10 Americans ages 65 and older receive Social Security benefits. The amount you receive is based on factors such as your age, years of work and average income, and any additional income you receive after retirement.
These are insurance products that allow you to invest a lump sum and in turn, draw a fixed amount of income that is guaranteed to last throughout retirement — as long as you live.
. When you retire, your budget — and your living situation — may change. It may be a good time to chat with your agent about whether your life insurance policy still suits your needs.
No matter which stage of life
you're in, a local Allstate agent can help you plan for the future. He or she can explain the many different financial options available so you can choose the ones best for you and your family.