October is National Financial Planning Month and a great time to review your finances and think about the importance of hiring a Financial Planner or other financial professional to help make the big (and small) decisions. As we move closer to the end of the year, and personal finances are more top of mind, we would like to discuss some easy concepts and help you to understand the role of a Financial Planner in your life.
Building and Sticking to a Budget
Step 1: Make of list of your monthly expenses
- List of both fixed (ex: mortgage, food, clothing, transportation) and discretionary (ex: entertainment, hobbies, vacations) expenses
- Also make note of any out-of-pattern expenses such has home/auto repairs and holiday gifts
Step 2: Include savings in your expenses
- Allot a specific amount each month to savings, based on your personal financial goals
- It is often recommended that you set aside at least 15% of every paycheck towards savings
Step 3: Subtract your monthly expenses from your monthly take-home pay to determine your monthly budget
It will look different for every person, but a good rule of thumb is to follow the 50/30/20 rule.1 This rule states that half of your take home pay should be used on needs (food, rent, utilities, etc.), 30% on wants (entertainment, travel, luxury items, etc.) and 20% should be spent on savings and reducing debt.
Once you have established a budget, you will need to stick to your plan. This is probably the hardest part in the process as it requires you to follow along every month. If you find that you’re consistently spending more than you earn, you will need to make adjustments. You will need to be prepared for the unexpected. Allowing for some flexibility is important for handling unexpected large expenses. Before making any large purchase, it is a good idea to evaluate if something is a want or a need. There are apps that you can download that can aid you in building and keeping a budget.
Be Smart With Your Debt
Not all debt is bad and often it can be necessary. It becomes more of an issue when you are frequently unable to make payments or if the debt comes with high interest rates.
Banks use “debt to income ratio” to determine an individual’s “credit worthiness”
- A debt-to-income ratio above 40% is bad
- A debt-to-income ratio around 36% is deemed “acceptable”
- A debt-to-income ratio below 30% is good
To reduce your debt, it’s a good idea to have a Debt Reduction Plan2
- Pay off your debts with the highest interest rates first and constantly be reducing what you owe
- If your spending is consistently above your income, you will need either adjust your lifestyle of find a way to earn more money
Understand Interest Rates
Interest rates are another element that can quietly impact your financial health. Depending on the position of the stock market and your personal credit score, mortgage rates generally hover between 3% and 6%. The average credit card interest rate as of March 2022 was nearly 20%.3,4 High interest rate debt can quickly become unmanageable so it is vital to know which debt should be paid off first.
Understanding interest rates can help you make strategic financial planning decisions. Taking a low-interest loan instead of paying cash may allow you to invest more in an investment vehicle that could generate a higher return than you are paying in interest. For example, if you have $10,000, you might consider putting $2,000 toward a car and financing the rest at a 2% interest rate while investing the other $8,000 in the S&P 500, which has delivered a compound average annual growth rate of 10.7% per year over the past 30 years.5
The Role of a Financial Planner
The role of a financial planner is to help you and your family figure out how to best save earnings, retain value, grow holdings and meet long-term financial goals. Planners should provide short- and long-term expectations with the same portfolio. The value of the planner is that he or she provides the client an objective opinion informed by education and experience of where appropriate to put assets that will have a higher likelihood of financial goal success.
A Financial Planner mostly advises on the void between tax accountant and the brokerage trader. Some financial professional bridge the gap between CPAs and traders by offering investment management and full-service financial planning. When hiring a financial professional, you will want to make sure they are the right fit for you and your needs. You may want to determine:
- How long they have been practicing
- What their credentials are
- If they have any specialties
- The typical clients that they work with
- If they can provide references
- How they are compensated
Get Covered by Insurance
Another component of financial planning to consider during National Financial Planning Month is insurance. If others are relying on your income, it is important to consider protecting their way of life with financial vehicles like life insurance. For more information about life insurance, click here for our article published to celebrate National Life Insurance Awareness Month. In addition, you should definitely consider renters or homeowners insurance, car insurance, disability insurance, and health insurance.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.