• Alyssa Barton

Financial Planning Basics

Updated: May 6, 2019



Do you have a financial and retirement plan?

I’m 34 and yet it wasn’t until about a year ago that I started to make a workable plan for financial independence and retirement. I have always saved, tried to minimize debt, and tried to maximize my income. I’ve thought long and hard about my financial future. The thing is: the thinking and doing weren’t part of a long term strategic plan.

I started saving for retirement as a child, but until recently I had no idea if what I was doing was good enough to get me where I wanted to go, because I didn’t know where I wanted to go.

Are you like me, in the early planning phases of your financial future? Or, are you still living paycheck to paycheck without a plan - hoping that what you’re doing is good enough to get you to some vague goal of “retirement”? Or, are you already financially independent? This blog will be more helpful for the former than the latter.

MOST PEOPLE DON’T HAVE A SOLID FINANCIAL PLAN

Research shows that today, two-thirds of Americans would struggle to scrounge up $1,000 in an emergency. According to one source, in 2017, only 24 percent of millennials demonstrate basic financial literacy. A 2017 report in MarketWatch found that half of American households currently live paycheck to paycheck: 19% have NO MONEY at all saved to cover emergency expenses; and that 31% have less than $500 in emergency savings.

Americans now have record-high credit card and student loan debt, and many folks are reaching “retirement” age without the confidence that they can actually afford to stop working. A report by Smart Asset in 2019 states that 29% of households 55 and over have no retirement savings or pension, and the median net worth for Americans age 35-44 is just $14,226.

Why are we so financially insecure in one of the world’s most prosperous countries???

It seems to me that these days, most kids in the U.S. (“kids” meaning people under age 30) aren’t taught even the basics about budgeting, how to manage our personal finances, and how to plan for our financial futures. Though I learned how to write checks and balance a checkbook in 8th grade, for the most part, personal finance and money management skills aren’t taught in public schools. Even if you take college courses in business, finance, or economics, you won’t necessarily learn how to put the skills necessary to thrive personally into action for yourself.

If you don’t have financially savvy parents or mentors that are willing and able to take the time to share their knowledge and skills with you, and to walk you through visualization and planning processes to create solid financial goals, then like me, you’ll learn that the burden is on US as individuals to do the work.

As I’ve gotten older I’ve slowly started to plan for longer and longer terms, but I never had an idea of “what I wanted to be when I grew up” – let alone how much money I wanted or needed to make to live a happy lifestyle.

When I was young I only thought about tomorrow, or next week. When I was in college I thought in terms of semesters and school years – getting the best GPA (while also having fun). When I graduated college I focused on getting into the best law school for me, and getting the best education possible, so I only planned 3 years ahead. When I graduated law school, I thought about getting the best job I could, but I hadn’t identified a specific field that I wanted to work in or type of law practice to focus on. Without these specifics, I couldn’t start thinking in terms of dollar figures.

It wasn’t until I moved to Seattle and transitioned into an intentional job that I actively pursued in the field that I chose to build a career in, that I finally started to make the mental space for long term financial planning. An actual, systematic, year by year plan to reach concrete end goals, with milestones along the way to reach my goal “retirement” number.

Creating an actual PLAN is critical to achieving the lifestyle you want to live. Until you have a plan and actually run the number scenarios to see where that plan will get you, you’re can’t know if your financial habits are good ones for you.

HAVING A PLAN MATTERS

I’ve learned that it’s critical that we educate ourselves as much as possible about personal finances, and the sooner, the better. The sooner you can create a plan for your financial future and start executing it, the better off you’ll be – that’s just how interest works. The more money you have invested at an earlier age, the more interest it will earn. That money can keep compounding over the years. Simple scenarios prove that the earlier you start investing, the better off you’ll be.

Let’s say you invest $10,000 by the age of 20. Presuming you retire at age 60, at 7% interest annually over 40 years (a modest average annual return for mutual funds). Even if you never invest another dollar after age 20, your initial $10,000 investment will grow to about $150,000 by the time you’re 60. Not bad.

If you wait until age 30 to invest that $10,000 at 7%, giving you only 30 years for it to accrue interest until you want to retire at age 60, well then you’d walk away with only $76,122.50 in your retirement account. And, if you wait until age 40 to invest that $10,000 at 7%, guess what? You’ll only have about $36,696 saved up by age 60. Not good at all.

Here are some other scenarios I’ve mathed out to convince you to stop waiting and start planning, saving and investing for your retirement right now.

Let’s say that you start to sock away $5,000 a year in an investment account with a 10% annual return. If you start to save at age 25, 35, or 45, here’s the difference in what your retirement account might look like at age 60:


  • Please excuse any errors in math, as I’m not an expert!

Note: I’ve stopped the calculations at age 60, but you can (and might have to) keep working longer than age 60. For some people, following these calculations could be more than enough for retirement.

Laying out the numbers in a spreadsheet or chart will help you understand the implications of your financial decisions over the long term. Getting started just 10 years sooner might triple your results.

You can run all kinds of scenarios based on various principal investment amounts, various annual contributions, and various interest rates. Whether or not the end retirement number works for you depends on your lifestyle needs. The annual % return on your investment can be more important than how much you’re putting in up front or each year, but overall the golden rule is that the more you put in earlier on, the better off you’ll be!

So, have you started planning for your future yet?

If you’re ready, here’s a great place to start.

STOP WHAT YOU’RE DOING, AND START PLANNING FOR YOUR FINANCIAL FUTURE TODAY

I think you can start a retirement plan in 3 simple steps.

  1. Figure out how you want to live when you’re older.

  2. Figure out how much that lifestyle will cost you, in terms of an annual dollar amount,

  3. Map out a plan to get you there: how much do you need to earn each year from now until your target retirement date to allow you to save up a dollar figure that will cover your annual living costs after retirement?

Last year, I started to listen to a podcast called “Radical Personal Finance” by Joshua Sheats, and it really got me thinking. The second episode simply pondered these questions: what do you want, and why? These are fundamental questions to start asking yourself, and answering, in order to plan for your future.

Step 1 to understanding how much money you will need to accumulate to retire should be to ask yourself: what kind of lifestyle do I want to live, and what is that going to cost me? Here are some example questions for you to think about. Think about how these answers might change at age 40, 50, 60, 70, 80, or even 90:

  • Where do you want to live? Do you want to live in the U.S.? Or in another country? In which state? In a city, suburbs, or a rural area?

  • Will you rent, or own the place you live?

  • How much will the house/apartment/RV cost you in rent, condo association fees, property taxes, maintenance and repair costs, mortgage, or other expenses?

  • Do you want a family?

  • How many kids do you want?

  • Will they go to college, and what will that cost?

  • How much money will you need for each child’s clothing, food, insurance, healthcare, education, and other expenses?

  • How long will they live at home – will you kick them out at a certain age?

  • Will you buy your kids cars?

  • Will you have pets? What will their care cost you?

  • Do you want to educate yourself later in life, or pursue a degree?

  • What hobbies will you engage in, and how much money will you need to keep doing them?

  • Will you travel? How often, and how much money will you need?

  • In your current job, what is your current salary, what is the annual pay raise schedule, and how much can you make in your current job in 5 years, 10 years, 20 years?

  • Do you see yourself in your current job in the future?

  • What other options are there for you to advance in your field and earn more? What is the highest paid position you can reach in your field, and the maximum income you can earn? Will you climb that high or stop below your potential? At what age will you reach the maximum salary you desire? How much is that?

  • How long will you work?

  • Will you earn side income from a side business, investments, inheritance, or from other outside sources?

  • What is your current budget – what is your monthly income, versus monthly expenses, and how much are you investing in a retirement account or accounts or investments? How will this change over time?

These are just few of the fundamental questions to start thinking about and answering before you can know how much money you’ll need saved up to retire. An important component to consider when thinking about these questions is: WHY?

To understand your “whys” you need to understand what really matters to you. That is, you will have to get to know yourself and understand your core values. Is the lifestyle you’re imagining in your head really the lifestyle that will make you happy? Will you need more? Or, can you do with less? Do you feel you need a personal jet plane and a house in 5 countries, or could you survive off of $750,000 in the bank paying you a small annuity to cover a simple lifestyle once you retire?

Step 2: After you’ve shaped a vision of your future for yourself, step two involves performing some basic calculations to determine how much money you’ll need saved up for retirement to enable you to make that future dream a reality. Here’s a basic sketch of what this might look like:

Math out the annual cost of living for your future self.


Step 3 will be to map out a financial plan to get you to this end goal. That’s a bit trickier, and I can cover this topic in a later blog. And, there are lots of other retirement calculators available online from different sources to help you map out your path to the future. Some even provide free spreadsheets to input your numbers and do the math for you!

If all of this seems overwhelming, don’t worry. Take a deep breath. You’ve got the rest of your life to figure it out – but you should get started now. It’s never too soon to start imagining your future and preparing a plan to get you there.

The possibilities are endless, and actually super fun to start imagining and playing with. What I came to realize after playing with some scenarios like the ones above is that the only limit on your future is the boundaries of your own imagination. If you can imagine it, you can map out a strategy to get there – you just need to be smart enough to craft a plan, enterprising enough to make it a reality, and determined enough to stick with the path once you’re on it.

So, what future will you build for yourself today?



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©2019 by Alyssa Barton