Bite-Sized Financial Planning

All too often, I talk to someone looking for financial advice and they don’t know where to start. I was talking with a friend recently who wanted some advice on what investments to hold for retirement. As I talked to him more, I realized that asset allocation was the least of his worries. A list of things I heard in one conversation:

• Like two in three Americans, he didn’t have a budget and didn’t know how much he could save every month.
• Like 42 percent of Americans, his family wasn’t covered in the event of his death or disability.
• Like most people, he had less than $10,000 saved for retirement. Even though he had set aside some money in savings for the long-term, he didn’t have the first idea about how or where to invest that money.
• Like most Americans, he was clueless about how much to expect from Social Security in retirement. Seventy-one percent of Americans don’t even know the full retirement age for claiming benefits.
• Like most people, he had little to no time to think about finances, and even if he did it was probably too stressful. A recent survey found that people spend an average of 80 minutes a day thinking or worrying about money.
• He is self-employed. Like about half of Americans, he is not covered by a pension of any kind.
• He has no family members that work in finance, and he’s not sure where he should place his trust. Nearly half of Americans agree that it is hard to know which adviser to trust for financial advice.
• Like six out of 10 Americans with children that plan to go to college, he has no college savings. And like a whopping 86 percent of people that plan to open a college savings plan (529 plan), he doesn’t know the steps involved.
• Like half of all Americans with children, he has no will.

This story is too typical. So what is he to do? Some financial planners would suggest a comprehensive financial plan, soup to nuts. But such a plan could cost thousands of dollars and may stress him out more than ever.

My suggestion is to take a bite-sized approach to financial planning. Be the tortoise, not the hare. It takes time and effort to track your budget, start an IRA, buy life insurance, start saving for college, and draft a will. Don’t try to do it all at once. Bite off what you can chew and make progress. Produce victories and celebrate them.

First, I would suggest getting a modest life insurance policy that covers his family in the event of a tragedy. That’s going to take time and effort. He’ll need to research policies, talk to different people, fill out the paperwork, and so on. Set a goal to have that done in the next six to nine months.

Next, I would suggest that he start to track his budget. I’ve recently signed up for mint.com to track my expenses and income, and I found it to be a valuable tool (cable TV and phone services were obvious places I could make cuts). Now, he may not get a perfect sense of his budget for a while, maybe even a year. That’s why it’s step two in a long process of bite-sized financial planning.

After he’s established a budget and protected his family in the event of a tragedy, he can start to think about how to fund an IRA for retirement. With a well-understood budget, he will be able to know exactly how much he can automatically set aside every month. He can take his time and do some research on the best approaches to investing. Hopefully he’ll follow my advice and invest in low-cost index funds or ETFs.

Now we’re three years into the future and he has a budget, life insurance, and an IRA. At that point he might start a 529 plan for college saving and he can start to think about drafting a will. Again, these things are difficult. They will take time and outside expertise, but at least he’ll have his other financial affairs in order.

This approach to financial planning offers a more reasonable approach than to try to do everything at once. What’s important is to develop a road map for the future. The slow road is better than no road at all.

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