Personal Financial Planning – Setting Yourself Up for Success

Written by:

Baylor Cox

Reviewed by:

• David Limerick

It’s Never Too Early to Develop Sound Financial Habits

Consider these facts and figures about the importance of financial planning for millennials:

• An estimated 3.75 million millennials owe on average $20,000 to $40,000 in student loan debt.
• Millennials have accumulated 34% less wealth compared to previous generations.
• Home ownership rates among millennials lag behind Gen X and Baby Boomers; roughly one-fourth of millennials believe they’ll be “forever renters.”
• Less than half of millennials believe they’re on track to hit their retirement savings goals.

When you add in economic factors like high inflation and rising interest rates, which can make obtaining a mortgage more expensive, the financial challenges many millennials face to get ahead become even more … well, challenging.

This overview will help you become familiar with the basics of financial planning and start taking control of your financial future. It offers you ways to improve your financial life, whether it’s through budgeting, debt management, investing, retirement planning, or some other aspect of managing your financial life. And as you move ahead on the path to financial wellness, remember your LPL financial professional is always available to help.

Enjoy the journey!

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There’s no better time to start pursuing your financial goals than right now. The earlier you start, the more time you have to work toward them.

It’s easier to manage your money and make progress toward your goals when you have a strategy. Financial planning can help you evaluate your unique money situations as they come up and make suitable decisions for your future.

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Become an Investor

One of the biggest opportunities you have to build personal wealth and financial wellness is through investing. But how do you know you’re ready to take the plunge? Since investing always includes some risk, it’s important to have a solid financial foundation before you begin. Here are some key things to make sure you have covered to make sure you’re ready.

• You have a steady income (sounds obvious, but it’s important)
• You’ve built up your savings, including a 3-6 month emergency fund, before establishing an investment account
• You have money left over after meeting your financial obligations
• You’ve considered the effect of upcoming personal changes, such as marriage, children, or divorce, before investing

Investing and Your Financial Goals

No matter what your financial goals may be, here’s a quick look at the key types of investments available to help you achieve them.

Stocks

A stock (also known as “equity”) is a type of security that signifies an ownership in the issuing corporation. This entitles the stockholder to that proportion of the corporation’s assets and earnings. Stocks are bought and sold predominantly on stock exchanges and are the foundation of nearly every portfolio.

Stocks (and stock mutual funds and electronically traded funds, called ETFs) have a high return potential, but the potential risk can be high. They are typically considered as part of a long term financial goal, like retirement, where you have time on your side and can afford to be more aggressive and take more risk. They usually do not make sense for funding a short-term financial goal where safety and stability are more of a priority.

Cash Equivalents

Cash equivalent investments are typically money market funds and can include U.S. Treasury Bills. They’re known for consistent, lower returns with much lower risk that may make more sense for a shorter term financial goal such as saving for a wedding or vacations. As you get closer to retirement (generally within 5-10 years), cash equivalents may also become a bigger part of your retirement account portfolio if you are seeking much more safety at this life stage.

Bonds

Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer. Bond details include the end date when the principal of the loan is due to be paid to the bond owner and usually includes the terms for interest payments made by the borrower.

Bonds (and bond mutual funds) may work best for funding a medium term financial goal (such as a down payment on a new home, a remodeling project, or having a child) where you can take on some risk, but less than stocks. In addition, as you get closer to retirement (within 10 years in general), bonds and bond funds may also become a bigger part of your retirement account portfolio if you are looking to reduce risk but still want some growth potential.

Diversify Your Investments

By diversifying your investments, you are managing the risk you will incur since you’re not putting all your eggs in one basket. Different investments have different risks involved with them. For example, stock or bond mutual funds may be considered riskier than putting your money in a money market fund. However, mutual funds generally have higher return potential. By diversifying your portfolio, you can seek to reduce the amount of risk you are exposed to while increasing your potential returns.

Need Help Getting Started?

Professional help is available if and when you need it. LPL Financial services professionals can give you hands-on personal guidance to help you determine your retirement goals and how you can work toward them. They can:

• Help you understand different types of investments and their place in a balanced investment portfolio.
• Discuss professionally managed investment strategies that may be of interest to you.
• Meet with you on a regular basis to track progress and adjust as necessary.
• Help you determine your financial goals, such as retirement, buying a home, funding a college education, starting your own business, or just getting better at budgeting and paying down credit card debt.
• Help you determine an appropriate investment strategy for your financial goals, based on your risk tolerance and time frame.

Learning Resources

Becoming an investor means making a commitment to increase your knowledge by subscribing to daily financial news reports such as the Wall Street Journal app, among many others available. You can also ask your LPL Financial services professional to sign you up to receive the LPL Research Weekly Insights report.

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Tactical Tip – It Pays to Start Investing as Early as You Can!

The younger you are when you start investing, the more time you have to benefit from what is known as compounding. Compounding happens when your money – your initial investment – starts earning interest, dividends, and/or capital gains (when stock or mutual fund prices go up). Those earnings get added to your initial investment, and start earning interest, too. So now you’re earning interest on interest — that’s compounding.

Here’s a hypothetical example: Let’s say you start with $1,000 in an investment account, and it earns $100 in the first year. The next year, you earn interest on $1,100 (your original $1,000 plus the first $100 it earned), and end the year with $1,210 ($1,100 + $110 more interest earned) … and that just keeps going.

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Tactical Tip

Your LPL financial professional can help you determine your retirement saving goals and how you can confidently pursue them. That includes helping you decide between a Roth and traditional contribution, creating and monitoring your investment strategy, and balancing your retirement savings goal with other financial goals.

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Moves to Keep in Mind

Here are some additional components of financial planning to keep in mind to help you achieve financial wellness.

Execute essential legal documents

Having a plan for the unexpected will reduce stress and expensive repercussions during potential emergencies. Consider having the following legal documents drafted and executed by an attorney so a trusted person can step in to assist in case of incapacity or early death:

• Will: Outlines how property should be divided at your death and designates a person to handle the details. Without one, courts will make decisions according to state law and not your wishes.
• Living Will (aka Advanced Directive): Outlines preferences for treatment if you face a serious medical situation and need machines to help you stay alive.
• Medical/Health Care Power of Attorney: Often part of a living will, it designates a person to make medical decisions for you if you are incapacitated.
• Durable Financial Power of Attorney: Designates a person to make financial decisions on your behalf if you are unable to do so at some point in time.

Reviewing Insurance Coverage

It’s important to ensure you have the right insurance coverage for your stage in life. Consider the following:

• Life Insurance: In general, life insurance gets more expensive with age. Term insurance for a young, healthy person is relatively inexpensive and a good idea if you have debts that will need to be paid if you die unexpectedly or if you have a family to provide for.
• Disability Insurance: Your employer may offer disability insurance, which comes in handy if you get ill or injured and cannot work.
• Property and Casualty Insurance: It’s a good idea for younger adults to talk with an insurance professional to help them decide on the most effective car insurance coverage, as well as whether an umbrella policy is needed. Renters should also purchase renter’s insurance, as it can limit your liability if someone sues due to a personal injury or damaged property.

Partnering with a Financial Advisor or Planner

Taking control of your finances is a big undertaking. Luckily, financial planners can help you develop a plan tailored to your unique circumstances. In addition, their knowledge and expertise can fill in gaps in your understanding.

Before committing to a financial advisor, you’ll want to find out how they charge for their services. Financial advisors and planners can charge in multiple ways. For example, some advisors charge per hour or have a fixed fee based on a specific service they are performing for you. Others charge a percentage of the assets they manage.

At this stage of life, you may not have a need for a comprehensive financial plan. Many planners offer customized services based on a specific need, such as reviewing your 401(k) plan and making investment allocation recommendations, or helping you create a cash flow management plan.

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