The Procrastinator's Financial Plan
Like dieting, exercising, and flossing, financial planning is an important task that's easy to put off. All of these are things we know we should be doing, but rarely do they have any immediate negative consequences. It's only when our clothes don't fit right, or we receive bad news from our doctor or dentist, do we see the results of our procrastination.
The good news is that financial planning is easier than dieting, takes less time than exercise, and is more intellectually stimulating than flossing. The bad news is that it may force you to confront some hard truths, make some tough choices, and overcome some emotional baggage.
Here are the two most important planning steps you need to take:
Protect Your Family. I often meet people with no wills, no guidance for their family, and no planning for their loved ones. These people aren't bad or selfish; rather, they've resisted taking the time to cover their bases.
At a bare minimum, prepare a will, a legal document which appoints someone to manage your estate and instructs him or her to distribute it to your named heirs. A will also appoints guardian(s) to raise your children until they're adults.
What if you have no family? If you want your estate passed to friends or charities, you'll need a will for that too.
Consider pairing your will with an advance health care directive, which appoints someone to make medical decisions on your behalf, and clearly states which medical treatment you want (and don't want) in case you're unable to verbalize your wishes.
Most libraries and hospitals will have paperwork to create these documents yourself. Nolo Press (http://www.nolo.com/legal-encyclopedia/california-living-will-health-care-power-of-attorney-31806.html) in Emeryville has online information and forms. However, ideally you should consult with an attorney when working on these issues.
A final step to protecting your family is insurance. You should speak with your employer's human resources or benefits department about life, disability, and health insurance. If your employer can't or won't provide enough coverage, seek out an independent insurance agent.
It's no fun to think about dying or getting sick. That said, I guarantee it's better that you deal with this now, rather than your family and friends after you're dead or dying.
Get Organized and Get Real. Enough about dying, let's talk about living.
As a general rule, people want to increase their net worth. More money, for better or worse, gives you more opportunities to choose how you progress in life.
The first step to increasing net worth is reducing debt. I'm not so concerned with mortgage debt, as you're borrowing against an investment that tends to grow over time. With interest rates low, I don't even mind car loans, if you can't afford to pay cash.
What does concern me is credit card debt. Truth time: this indicates you're living beyond your means. Yes, some people will use these for medical expenses, to support a business, or to cover a period of unemployment. But in any case, I want you to pay these cards off as soon as possible, and establish an emergency fund so you won't have to draw upon them again.
Next, start saving money. As much as you can. In any reasonable investment. Just do it.
Without savings, on some level, you're just a slave. Without savings, you're putting your efforts towards someone else. Without savings, you have few choices, and little leverage.
If you can't afford to save a significant portion (at least 10%, preferably more) of your income, then you've got some tough choices to make. Otherwise, what's your game plan? Social Security will help in retirement, for example, but will most likely not give you a great quality of life. Pensions are great, if you're in the minority who will still receive them. For everyone else, get real, and contribute as much as possible into 401(k) plans, 403(b) plans, IRAs, anything.
We could talk about which investments to choose, asset allocation, tax control, and the like. But none of those topics are as important as the act of saving itself.
I understand how easy it is to procrastinate rather than work on these tasks. It's no fun to contemplate mortality and morbidity, or to save rather than spend. But working on these issues now will save you (and your family) headache and heartache down the road.