A Financial Plan Starts With the Decisions Ahead

January 22, 2024 · Financial Forte Staff

Historical article: prepared retrospectively using information available as of January 22, 2024.

You may know what you want your money to accomplish and still feel unsure about what to do next. Retirement matters. So does replacing an aging car, helping a parent or getting a credit card balance under control. When everything belongs on the priority list, the list itself doesn't tell you where the next dollar should go.

A useful financial plan connects those goals to decisions. It identifies what needs attention first, what can wait and what would cause you to reconsider. You don't need to predict the rest of your life to start. You need a reasonably accurate picture of the resources and choices in front of you.

Give each goal a job and a date

“Save more” is a direction. “Set aside money for the car before the lease ends next spring” identifies a decision with a deadline. That difference helps you compare a goal with the other demands on your income.

Start with three concerns that could change your finances during the next year or two. For each, write down what you're trying to accomplish, when money may be needed and what happens if you delay. A necessary home repair may deserve a different place than an optional trip, even if the trip is more enjoyable to picture.

Not every goal begins with a dollar amount. Reviewing who could handle your finances during an illness may begin with finding documents and discussing responsibilities. A plan that covers only investments can overlook decisions that matter just as much to the household.

Once the goal is clear, identify the next action and the person responsible. “Review insurance” can sit on a list for months. “Request the current policy summary by Friday, then compare coverage with our obligations” is something you can actually complete.

Compare the goals using the same dollars

Consider a hypothetical couple, Ana and Luis. After regular bills, minimum debt payments and their existing workplace retirement contributions, they have $900 a month available. They want to strengthen their cash reserve, replace a car and increase retirement saving.

Their initial plan assigns $500 to the reserve, $300 to the car and $300 to retirement. Each choice sounds sensible on its own. Together, they require $1,100. The missing $200 is a planning problem, not a failure of motivation.

They decide to direct $500 to the reserve, $250 to the car and $150 to additional retirement saving for six months. Without assuming investment returns or interest, that would add $3,000, $1,500 and $900 to those goals. Existing retirement contributions continue; this example concerns only the extra money.

The allocation is not a recommended formula. It reflects their circumstances: their current reserve feels thin, the car can last longer if necessary and neither has an immediate employer-match opportunity left unaddressed. A household with expensive revolving debt or a different benefits arrangement might reasonably choose another order.

The useful result is that their choices now fit the same $900. They can explain what the slower car saving buys them: more near-term breathing room. They can also see what it costs: a longer wait or a less expensive replacement. They agree to reconcile the car fund with the reserve before committing to a replacement purchase.

Make room for uncertainty before committing

A plan based on a perfect month can become frustrating quickly. Before automating transfers, look for expenses that don't appear every month: insurance premiums, school costs, home maintenance or family travel. Money already needed for those bills isn't truly available for a new goal.

Ana and Luis then find a $600 bill due at the end of six months. They reserve $100 monthly for it and temporarily reduce extra retirement saving from $150 to $50. Their revised $900 allocation is $500 for the reserve, $250 for the car, $50 for retirement and $100 for the bill. After six months, those transfers produce $3,000, $1,500, $300 and $600, respectively, without assuming returns. If the bill were due sooner, they would need to fund it faster. They can revisit the retirement increase once it is paid.

Comfort matters, too. Two households with similar incomes may reasonably choose different reserve levels because their jobs, health needs or available support differ. The goal is to make that preference explicit and understand the trade-off, rather than let a round number make the decision.

Some choices also interact with taxes, benefits or legal arrangements. Before moving retirement money or changing ownership of an asset, identify those consequences. A convenient transfer is not always a simple financial decision.

Decide what would make you change course

Choose a review date when you set the plan. Ana and Luis schedule a six-month check, but agree to revisit it sooner if either loses income or the car needs a major repair. Those are changes in their circumstances that could alter the order of priorities.

At the review, they will compare account balances and completed transfers with the amounts they intended to save. If they repeatedly withdraw money from the reserve for ordinary bills, the spending estimate needs work. If the transfers are comfortable and the reserve reaches the level they chose, they can redirect some future saving to the car or retirement.

Progress doesn't require every goal to advance at the same speed. It requires knowing why you've chosen that pace. This week, put three decisions on one page, assign the available dollars once and set a date to check the result. That is a workable beginning for a financial plan you can keep improving.

Related reading

• Build a Spending Plan Around the Life You Actually Live
• What Belongs in a Useful Written Financial Plan?

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Educational information, not personalized investment, tax, legal or benefits advice. Examples use hypothetical assumptions. Verify current rules and your circumstances before acting.