Financial Planning and Fiscal Fitness

Believe it or not, everybody can become a millionaire given enough time. Here’s the simple math behind it. Betty and Jonathan taught their son to put away $2,000 into an IRA each year, from the age of ten (10) through twenty (20), and he does no more with the money, but wait.

When Jonathan turns sixty (60) he will have over 1 million dollars with a 6% return. You can replicate this simple rule and your children will thank you because without really having to do much they will have a secured amount, as big as 1 million dollars, waiting for them, when they hit the golden years.

Dreams can be fulfilled, but the first step is to dream and aspire for it. So, you see, everybody can become a millionaire given enough time. 

To become a millionaire, consider the following points:

• Discipline equals success

Putting something away each payday is better than waiting until later. Frequently people do not believe they have money to put away. However, if you were to put away the cost of a pack of cigarettes or the money spent on Starbucks each week, you would be surprised to find that you could save many $$ a month.

• Systematic investing provides the building of wealth

Having money taken from your pay and put into a savings account is easy for many people, because they never see the money coming out of their check, they just see their account growing. Everyone needs an emergency fund. An emergency fund should be 3-6 months’ worth of living expenses, or a minimum of $1,000. The emergency fund can be placed in a savings account. Even though the interest rate may be low on a savings account, it could save you borrowing a lot of money with a high interest rate, in an emergency.

• Start today because the longer you wait, the less you make

Putting money away when you are 20 is easier than putting it away when you are 40, because you will need to put away three times as much if you wait until 40 to start saving. Compounding allows you to need less at an earlier period, which allows you to have more at a later period.

• Time and compounding are what make you money

Einstein said that the greatest secret in the universe is the power of compounding. Most people become rich from making money on money, not from finding secret stock tips. The key is investing money in something that pays you money, and then reinvesting it. For instance, buy stocks that pay dividends and then reinvest the dividends. This is better than buying new stocks and hoping they rise drastically over time.

• Speak with your Financial Advisor (if you do not have one, get one)

Discuss what type of savings plan can be established for you. As they say in physics, “An object in motion tends to stay in motion, and an object at rest tends to stay at rest.” There are many savings opportunities available and once you start saving, it is easy to continue.

Most of us are aware that we need to have a workout plan to stay physically healthy. Well, believe it or not you also need to have a plan to stay fiscally healthy too. So, after learning the theories we listed above on financial planning, let’s learn how to develop a specific financial exercise plan to know roughly how much you should be spending on a few different items. This plan is based on an annual basis of spending for the entire year. While some categories spent may be more than the annual range for any one month, if you stay in the range by the end of the year, you should be fine.

You should always have 6 month’s living expenses set aside in an Emergency Fund (Not invested, just sitting in a bank or credit union account), before you set about anything else. AND, if you are married or have children you MUST have term life insurance of ten (10) times the breadwinner’s annual salary.

After that, then the standard to try to manage is listed below (this is a guide). For example:

• Housing 17-25% (Rent/mortgage, repairs and escrow (property or renter’s insurance and property tax) payments)

• Food 10-14% (Includes groceries for yourself and the family only)

• Transportation 10-13% (Gas, car payment, repairs, insurance)

• Entertainment and Clothes 5-9% (Clothes, movies, theatre, theme parks, gifts to others and holidays)

• Utilities 5-9% (Gas, electricity, water and phone)

• Retirement Account 15% (This is from your Gross income, and you only do this AFTER you have an emergency fund saved)

• Healthcare 7-10%

• Charity 5-10% (Ideally 10% is best, but sometimes you must adjust, what you donate to local charities)

Once you get an idea of what your specific spending habits are, you might be able to adjust so that you meet or even beat the average of the American taxpayer.

Additionally, you should have an idea of the priority of spending for these categories (which bills should be paid first, second, third, etc.):

1. Food
2. Housing
3. Utilities
4. Transportation

5. Healthcare
6. Retirement Account
7. Charity
8. Entertainment or Clothes

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