The Basics of Financial Planning for All Ages

Whether you are a young adult just starting out, have a young family and realize it is time to better organize your spending and plan for the future, or your kids are grown. Out of the house and you wonder if you can ever afford to retire, these five basic financial strategies will help you get on track.

#1: Pay Off Your Credit Card Debt

This is number one for a reason. Credit card debt is the most expensive debt one can have. With interest rates commonly ranging from 14-24% and even higher, just paying the minimum can cause the debt to grow out of control.

For example, if you have a credit card with an 18% interest rate and a balance of $2,000, you might think that paying the minimum of $80 will pay that off fairly quickly. However, any online calculator will confirm that it will take you 32 months to pay it off, and you will have paid $525 in interest!

Paying off your credit card debt as soon as possible is the best way to avoid wasting money on interest charges. This must be your number one priority.

#2: Save 10% of Income for Retirement

Once you’ve paid off your credit card debt, resolve to save 10% of your income in your retirement years. If you have a pension plan such as a 401(k) that allows you to contribute pre-tax dollars for each pay period. This not only allows you to save for retirement but also in income tax as your taxable income is reduced by the amount you save, putting you in a lower tax bracket.

If your employer matches contributions, do contribute at least the amount that is matched; otherwise, you are leaving free money on the table. If you can save more than the amount that is matched, consider opening a Roth IRA with that money so you can further diversify your retirement investments. The limits on Roth IRA contributions over $6,000 for 2020 are $6,000, and those aged 50 or over can contribute an additional $1,000.

#3: Save 10% of IncomIncomean Emergency Fund

Here’s where you avoid more credit card debt. Save another 10% of incomIncomeemergencies, such as an expensive car or home repair, uninsured medical bills, the washing machine breaking down, you get laid off, you name it. Conventional wisdom suggests maintaining an emergency fund of 6-8 months’ living expenses.

That sounds like a lot and may take a couple of years to amass, but that money will earn interest in your savings account and be accessible should an unexpected expenditure arise.

The feeling of security you will have when you know that money is there for you can’t be beaten.

Once you’ve fully funded your emergency savings account, but that 10% you’ve been saving elsewhere, like your children’s 529 education savings plan, a new car or home improvements, or even travel, shift that 10% back to emergency savings if an emergency arises and you have to spend some of your emergency funds.

#4: Budget and Live Within Your Means

You have paid off your credit cards and are saving 10% for your emergency fund and another 10% for retirement, leaving 80% of your income on.

Write down all of your monthly expenses. This includes rent or mortgage, student loans, car payments, car maintenance and fuel, insurance, groceries, utilities, personal care, holidays/gifts, and entertainment. Don’t forget the entertainment!

Does the sum of all this exceed 80% of your monthly income? Income a hard look at your expenditures and see what can be trimmed. Can you go out to dinner twice a week instead of three times? Can you combine trips and save money on gas? Can you get your hair cut or nails done every four weeks instead of three? What about your cell phone, cable, or internet plans? Is there a way to cut back? Can you turn the heat down and wear a sweater?


When you assess your spending like this, you’ll be surprised at where you can painlessly save money. 

#5: Pay All Bills in Full and On-Time

It is never too late to start doing this, and it will improve your credit score. Why should you care about your credit score? Those who have higher credit scores can borrow money more cheaply.

For example, Sally and Nancy want to buy the exact new car. Sally has a credit score 670, so she will be considered a “prime” borrower eligible for an auto loan at 4% interest. Nancy has a credit score of 640, which is only 30 points less than Sally's, but she is considered a “subprime” borrower. She wialso ll be offered an auto ltoo, but at 11%.

They borrow $20,000 to purchase their car and will pay off their loans in 60 months. At the end of those five years, Sally will have paid $22,100, and Nancy will have paid $26,091.

Wouldn’t you like to save almost $4,000 in interest on your car loan? Moreover, Sally’s monthly payment was $368, and Nancy’s was $435. Having a credit score of only 30 points higher put $67 more in Sally’s wallet each month.

Simply paying your bills in full and on time will help improve your credit score. You might have noticed that when you paid off your credit cards, your credit score improved. That’s because your debt-to-income ratio improved. Good for you!

These five basic financial strategies will help you get control of your financial situation, be ready for emergencies, be eligible for low-interest loans, and save for the future. Good luck!