X

Christian Living

Finance

Create Your Own Personal Financial Plan

Imagine you’re preparing to build your dream home. Over the years, you’ve accumulated scores of ideas that you’d like to incorporate into it. Before construction begins, you sit down with your builder to review your design goals. You ask him how long before the blueprints will be ready, but to your surprise, he tells you he doesn’t work that way.

Rather than planning everything ahead of time, he prefers to develop the design as he goes along. He’ll keep your ideas in mind, but “blueprints are so restricting,” ” he says — he wants to have the freedom to be spontaneously creative as the house is being built.

Most of us would be reluctant to hire a builder like that! When building a house, we recognize it’s a good thing to have a carefully considered blueprint for action before taking on a challenging task. In fact, the more important the project, the more emphasis we place on careful planning.

Unfortunately, too many people use the “we’ll work out the details as we go along” approach when it comes to one of the most important projects they’ll ever take on: building a secure financial future. Yet, in much the same way that we live in a physical home, we each “live” in a financial home as well — one created by our past decisions. Many people reach retirement and find their financial home isn’t what they hoped for. That disappointing outcome results from a lifetime of making financial decisions independent of a master blueprint.

Two Basics

The first step to making a plan is to develop a clearly defined set of God-given goals. These goals will help you establish your financial priorities.

The second step is to create a spending plan (i.e., a budget). You may not like it, but a budget is an essential tool. Without one, you can’t intelligently implement saving and investing strategies because you don’t really know if you have any extra money to save or invest. Even if you seem to have extra money left over each month, perhaps that money should be saved for those once-a-year items (such as insurance premiums and summer vacations). Without a budget to help you plan and track, you won’t know if “leftover” funds truly represent a surplus. (Also, it’s unlikely you’ll be in a position to give generously to God’s work if you don’t plan for it!)

As you work through your goal-setting and spending plan, remember that this is a spiritual endeavor, not merely a nuts-and-bolts exercise. Your financial goals and budget will reflect how you view and use money. As Christians, we recognize that we are managers rather than owners, so it’s vital that you allow God to speak to you regarding your plans for His money. 

Married couples should make these planning decisions together — not just because it ensures “buy-in” from both parties, but because it establishes you as a team rather than opponents. Many marriages run aground over financial issues. So jointly establishing a financial plan may have farther-reaching implications than you think.

While there are no “one-size-fits-all” financial plans, certain experiences are common to particular phases of life. As you read the following scenarios, don’t get discouraged if you feel “behind.” The point is not to provide benchmarks for how far along you should be, but rather to provide guardrails to keep you on track and to help you think through issues common to each phase. Your situation probably will differ somewhat from what’s here, so make sure to personalize these to your individual circumstances.

The Young Person/Couple

Many young people spend their first decade (or more) out of school paying off school loans, car loans, and credit-card bills. Now throw in trying to save for a wedding, the down payment on a first home, building a savings reserve, and paying for the arrival and growing up of your little bundle(s) of joy.

Sound bleak? It doesn’t have to be. Unfortunately, many young couples waste the most productive financial years they’ll have for a while: those early marriage years when both spouses may be working and there are no kids in the picture yet. This is a golden opportunity to make serious headway financially, but too often it isn’t seized due to lack of planning. The sense of urgency that arrives with those two exciting words — “I’m pregnant” — often comes too late. Here’s what’s needed before that happens:

1. Make a budget, relying on your current spending to establish realistic initial estimates in each category. Establish your short- and medium-term financial goals. Then look at your budget again. Does your available surplus put you in a position to realize your goals? If not, it’s not unusual to go through several rounds of belt-tightening before finally settling on a workable budget. Consider these to be normal growing pains — chances are, it’s your first experience setting and living on a real budget.

2. Attack your debt, while avoiding further debt. This is tougher than it sounds, since most young people have yet to establish a savings reserve from which to absorb unexpected expenses. Couples considering having children are wise to attempt budgeting all living expenses from one income, while applying the other income entirely to debt reduction and saving. That will reduce the money you have for “fun stuff” now, but you’ll appreciate the flexibility later when your expenses soar and your family income (potentially) drops in half.

List your debts, including balances and interest rates. There are two debt-payment strategies to choose between. If you are highly disciplined, you will save the most money in interest by paying off your highest-rate debts first. A more motivating strategy for many is the “debt snowball” approach, in which you pay off the debt with the lowest balance first, then the next lowest, and so forth. Don’t underestimate the value of this psychologically; if seeing your debts fall one after another keeps you motivated, it’s worth paying a little extra interest.

Sound Mind Investing’s Accelerated Debt Payoff Calculator shows how much faster your debt will be eliminated based on various additional payment amounts — a powerful motivator.

3. Start building your emergency fund by opening a money-market account at an online bank and having money automatically deposited into it each month. For most people, we suggest establishing at least a small fund — $1,000 is a good target for most people — before focusing hard on debt reduction. Having a savings reserve will help keep you from slipping back to your credit cards when unexpected expenses arise.

Once your debts are largely eliminated, you can turn your attention toward building a larger emergency savings fund. Most financial planners recommend a fund of three-to-six months’ worth of living expenses. That may seem like a lot, but you’ll have plenty of use for it if an unexpected repair, purchase, or job loss arises.

If your debt is manageable, meaning you have a clear plan to pay it off reasonably soon, take full advantage of employer matching in your company’s 401(k) or other retirement plan if one is available. Contributions beyond the amount being matched take a lower priority.

Consider purchasing The Sound Mind Investing Handbook for more information about company retirement plans, IRAs, and other topics covered in this article.

4. Be conservative when buying/upgrading homes. Housing is likely to be the single biggest expense a young person or couple faces, and it is a driver of many other expenses. The home and neighborhood you choose will have far-reaching financial implications, both direct (insurance, taxes, furnishings) and indirect (school decisions, vehicle purchases, vacation plans). An affordable home is one that consumes no more than 25% of monthly gross income in mortgage/tax/insurance payments. Control the housing decision and you’ll likely be able to find money to save for the future. Failure to control this decision will likely result in it controlling you.

5. Start saving for college. If you already have a child, the clock is ticking on his or her education saving. Options for college savings include 529 Plans, Coverdell Education Savings Accounts, and Roth IRAs. Don't buy into the idea that you need to save a gazillion dollars for college either. There will likely be part-time jobs available and (to be avoided if possible) student loans to make sure Junior can still go to college. Don't be paralyzed by the huge numbers you read about; just start saving as much as you can, as early as you can.

The Middle-Aged Couple

Child-related expenses decline (at some point), which often coincides with the highest-earning years for most workers. In some cases, the mortgage may be close to being paid off. Details will vary from couple to couple, but at this stage of life there’s probably more surplus money available now than before. 

Your priority list includes:

1. Revise your budget to reflect your new level of income and expenses. This budget revision should be an annual event anyway, but I’ll include it in case you haven’t adjusted your budget in a while. Take a new look at your short- and medium-term goals as well. It’s getting down to crunch time, so if you’re serious about meeting those goals, you don’t have as much of a time cushion as you once did. Use that as motivation rather than letting it discourage you.

2. Take a financial inventory of your household. What debt do you have outstanding? What needs are coming up — additional school payments, cars that need replacing, home repairs you’ve put off? At this stage of life, debt should be pared back to a bare minimum. If you haven’t already done so, pay off credit-card balances, car loans, and other consumer debts. You likely have the cash flow now, so you can eliminate or reduce interest expense on big-ticket items (such as car purchases) through advance planning and saving. Consider additional mortgage payments in order to have it paid off by the time your anticipated retirement date arrives.

3. Get realistic estimates of how much money you’ll need to retire. A retirement-planning calculator can help you with this task. Having specific figures in mind will help motivate you if you need to start saving more, or potentially keep you off the austerity budget if you’re doing better than you realize.

4. Review your investing strategy. For many people, this will be happening regularly already as a result of managing retirement plan money at work or in IRAs they’ve established. But how you divide your money between stocks and bonds (which affects your risk level) changes as you move closer to retirement, so it’s important to make sure your allocations are still appropriate. (See point #6 for young couples for more on this.)

5. Maximize your retirement plan at work. Your 401(k) or other retirement plan at work probably represents your best opportunity to quickly save large amounts for retirement. The tax advantages of such accounts, which typically include pre-tax contributions (many 401(k) plans now include the option of Roth treatment as well) coupled with employer matching or other contributions, make it tough to beat.

6. Take advantage of IRA opportunities. Remember, your time horizon isn’t just until you retire, it’s through your retirement, which these days often extends another 20-30 years. So if you’ve maxed out your retirement plans at work, definitely consider saving additional retirement money in an IRA.

The Retirement Couple

With the freedom from your job comes the unsettling loss of that familiar friend: a regular paycheck. That loss of steady income makes many retirees feel they’re at the mercy of the financial markets to a much greater extent than they prefer. Don’t panic, you can have peace of mind despite this adjustment. But it’s definitely time to make sure your personal financial plan reflects these major changes. 

Here are some key points:

1. Re-create your budget to reflect the realities of your retirement income. This doesn’t just mean the changing amounts; it means the change in the timing of these payments as well. Match your living expenses to the amount and timing of your income, obviously remembering to include things such as Social Security income, pension benefits you receive, and so on.

2. Maximize your Social Security benefits. This is one of the bigger decisions you have at the onset of retirement, as the timing of when you (and your spouse if applicable) begin drawing benefits will lock in a significant component of retirement income for the rest of your life.  

3.  Determine your strategy for withdrawing money from your retirement plans. This is a major decision, one you should make with a firm grasp of your income needs (from your newly revised budget).

Let’s review a few options. Taking a fixed amount out at regular intervals is simple enough, but it exposes you to market declines and increases your risk of outliving your money more than other methods. A slight variation involves taking out a fixed percentage at regular intervals. This improves your odds of not outliving your money, as you take less out if your account balance declines. As long as you are still able to meet your expenses, this can work well.

Another option that greatly insulates you from market fluctuations is the “bucket approach,” which involves setting aside three-to-five years of living expenses in a savings account. Youpay all current expenses from this “savings bucket” rather than directly from your market-based investments. History shows that the stock market has made money a majority of the time when looking at five-year periods. Using the bucket approach is a good way to extend your time horizon, allowing you to be slightly more aggressive in your asset allocation, by ensuring that you won’t be taking money out of your plan disproportionately during down markets.

4. Consider the implications of which accounts you withdraw from when. Traditional IRAs, including IRAs you may have rolled over from your company retirement plan, have mandatory distribution rules that require you to start withdrawing from these accounts at age 72 1/2. Roth IRAs, by contrast, have no mandatory distribution rules, and in fact, get favorable tax treatment should you die and leave them to your heirs. While this order-of-withdrawal decision requires individualized number crunching and thought, taking money out of your traditional IRAs rather than your Roth IRAs early in retirement generally will leave you with more flexibility in later years than vice versa (due to the smaller mandatory distributions you’ll incur).

An even more aggressive way to leverage this difference in the IRA rules is to consider delaying the start of your Social Security benefits initially when you retire. You’ll have an extremely low taxable income as a result, which you can use to your advantage by converting chunks of your Traditional IRA into a Roth at rock-bottom tax rates. Having more Roth and less Traditional IRA assets will increase the flexibility of your future withdrawals, perhaps lower the overall tax rate paid on those IRA assets, and boost the amount of your monthly Social Security payments once they do begin. This sort of maneuver is complex enough that it’s likely wise to enlist the help of a good CPA to evaluate its effectiveness in your specific situation.

5. Reconsider your asset allocation and risk threshold. Retirement is a time to reduce risk, taking only as much as is necessary to meet your financial needs. Even if you’ve been an “all stocks, all the time” investor throughout your life, it’s foolish to take that added risk if you can live comfortably on the income provided from less aggressive investments. So look closely at what your specific income needs are, and reduce your risk (by lowering your stock allocation) if you’re able.

Conclusion

While the action steps listed above aren’t comprehensive, they do highlight key items to address in your personal financial plan at each stage of life. Having a step-by-step plan can help you stay on track when the inevitable financial temptations grab your eye. Your goals are worth sacrificing to achieve, and taking time to establish a comprehensive plan is the first step. So replace your good intentions with action by creating — and faithfully following — a personal financial plan. You’ll be glad you did when it comes time to move into the financial home you’ve built for yourself.

********

Mark Biller is the executive editor for Sound Mind Investing, publisher of America’s best-selling investment newsletter written from a biblical perspective. Through its website, monthly newsletter, and the small-group study “Multiply,” SMI helps people manage money effectively so they can live well and give generously.

© Sound Mind Investing

Loading Webform

Can We Pray For You?

Get FREE "He Cares for You" teaching sheet

Build up your faith as you mediate on inspiring Scripture verses of how much God loves you

Get more than a Sunday sermon. Get to know others seeking God’s guidance and wisdom for life.
We are here to help and encourage you! Send a prayer request now, or call 1‑800‑700‑7000
Can God change your life? God made it possible for you to know. Discover God's peace now.
Download the free myCBN app. Share your prayer requests, receive prayer and pray for others!
Living the Christian life is a journey. Discover steps to bring you closer to Christ.
Donate