For today’s guest post, please welcome Kyle from Financial Wolves, a blog about making money with side hustles to help you achieve financial freedom.
Let’s be honest—money decides how we live our lives most of the time. The kind of house you live in, the model of the car you drive, and the colleges your children will go to, all depend on money. To make our future better, we need to ask ourselves the right financial planning questions.
Not all of us can afford a financial advisor to answer such questions. According to a CNBC study, 75% of Americans manage their finances on their own. Whether you are living on a paycheck to paycheck basis or have a healthy portfolio of financial assets, planning your finances can go a long way in delivering your future goals.
Must to Ask Financial Planning Questions
Here are some key financial planning questions and their answers to help you make sense of it all:
1. What Are My Financial Goals?
If you do not have a plan, you will be like a chicken running without its head. Now, everyone loves money, but how much money is the question. Each one of us has different goals in life, and those goals require different amounts of money. If you know your goals well, you would have an estimate of the time and money you require to realize those goals.
You should make a list of your biggest goals in life according to their priority. For example, if you are a parent, your children’s college education might be your priority. If you are paying a mortgage, paying it off may be the first of your goals. This list can be as small as you like or as extensive as you feel the need for. Build a personal financial plan to prioritize your financial goals while building an executable plan.
2. Do I Have Enough Funds for an Emergency?
Preparing for unforeseen financial emergencies is one of the most intuitive things you can do for your future. Unfortunately, due to poverty and income inequality, almost 60% of Americans may be pushed into debt by a $1,000 emergency expense. This is saying a lot about the financial situation in the country and how difficult it has become for people to save money.
Bad stuff happens all the time, and it is just a matter of when it will happen. If you do not have funds allocated for the rainy day, you might have to take loans or borrow from family and friends. That would worsen your financial situation even more.
You should start saving for emergencies separately and start with at least $500. It is not worth it to rely on your credit card or your home equity line of credit. You can allocate a little from each paycheck to your emergency funds. You can use these ways to make money online to develop side hustle income to achieve your emergency fund savings goals faster.
3. How Much Should I Save for Retirement?
When we talk about financial planning, retirement is the number one concern for many people. People always wonder how much of their salary should go towards retirement. Some put the number at 10% while some go as high as 15%. There are a few things this number relies upon like your age, your income, and how much you already have saved.
Let’s just say 15% of your salary should go towards a retirement plan like the 401(k). Now, consider 15% as your goal. You can start lower if you cannot do 15% from the get-go. You need to build your finances in a way that eventually you are contributing 15% to this fund.
Having a retirement plan will not only secure your future, but also give you the peace of mind to live better in the present. Fidelity Investments recommends that by the time you are 30, you should have half of your annual income saved up for retirement. A tool like Personal Capital can help you understand where you stand with retirement savings.
4. How Much Debt Is Too Much?
In this day and age, managing money may as well mean managing debt. We all have to borrow money at some point in our lives, whether we are going to college or buying a home. This is something that can send a chill down your spine, but also something that is not all bad. If it were not for debt, many of us may never be homeowners or send our children to good colleges.
Most debts have high-interest rates, typically over 8%. Paying off your debts should be your priority. There is not a magic number regarding the debt ceiling. Technically, any amount of debt is too much. So ideally, you want to borrow money for things of value, that will eventually contribute to your income and help you pay back this debt you incurred.
5. How Should I Allocate My Assets?
There are a few factors that determine where you should allocate your assets. You should be considering your goals heavily. The investment time and your risk tolerance also play vital roles in this scenario.
As a rule of thumb, keep the asset allocation ratio 3:2. About 60% of your assets in your portfolio should be in stocks or equity, while 40% can go towards bonds or fixed income. If your financial goals are imminent, you may want to save money in a savings account instead. It only makes sense to take a risk with your long-term financial goals like retirement.
After you have determined the proper asset allocation, the next step is to determine good investments. Having a diversified portfolio is a smart way to mitigate any future risks. Also, keep in mind the investment fee and expenses. You ideally want to keep them as low as possible in relation to your actual investment.
The above five questions do not even cover half of the financial planning conversation. That said, each financial planning question and its answer will help you develop a solid plan for your future. More and more young people in the workforce are taking a keen interest in planning their finances.
Even if you do not have a financial advisor at your disposal, you have the internet and many experts that give valuable information for free. Make it a habit to do proper research before making any decision about your finances. To better your financial future, you need to be smart in your present.