Planning financially for life events makes change easier

Life happens, and planning for major life events provides direction for life, reduces stress at the time of change and could result in achieving the goal sooner.

Money often is a limiting factor in achieving many life goals. Diligent planning and saving for life events can reduce the costs of borrowing to achieve a goal and provide financial security and peace of mind.

There are a number of key life events that have financial implications. Identify the ones that are a priority and estimate how much money would be needed to achieve the goal or goals.

Developing a spending saving plan gives substance and direction for achieving these goals.

To develop a spending saving plan, the first step is to determine the current situation. How much money is coming in and how is it being spent or saved now?

From bank statements list all monthly/yearly income, tips, pension income and support payments. Then create a list of all monthly and yearly expenses. Also note expenses that happen only yearly, such as taxes or licenses, and any money that is now being put aside as savings.

One advantage of using bank debit or credit cards for all expenses is the record they create.

The expenses need to be prioritized into fixed, variable and flexible:

  • The fixed expenses are commitments that must be paid, such as rent, utilities, mortgage, loan payments, medication and insurance.
  • Variable expenses are necessary but variable, such as food, transportation, home maintenance, haircuts and clothing.
  • Flexible expenses are not necessary but are nice to have occasionally, such as meals out, coffee, entertainment, makeup, and online purchases and downloads.

Analyze the list for missing items that are paid yearly, such as taxes, driver’s licenses, home insurance, holidays and gifts.

Total all the yearly expenses and divide by 12 to give the amount that needs to be saved monthly to cover these yearly expenses as they occur. There may be three yearly expense totals: one with fixed yearly expenses, such as medical insurance; one for variable yearly expenses, such as school supplies; and one for flexible yearly expense, such as credit card, app or gaming fees.

Do another review for any money that is being set aside for savings, retirement savings, education funds or an emergency fund. Identify if they are saved monthly or yearly.

Create a list of all liabilities, including mortgages, loans, credit cards and outstanding bills. Include the balance outstanding and the amount paid monthly on the debt.

Ideally, all credit card balances and bills should be paid monthly to avoid interest and service charges. If the amount owed does not allow for this, make at least the minimum payment, but ideally make as large a payment as possible to reduce the credit debt as quickly as possible.

From the income and spending history, determine if there is money left over or if the spending is greater than the income. Overspending signals the need for some serious assessment of where the money is going. A change in priorities is needed to live within the income and to begin saving for life event goals.

From the spending history, a spending/saving plan can be developed. Using a spreadsheet, list all of the fixed expenses and a monthly amount to cover fixed yearly expenses. Calculate how much of the income is left. Now choices need to be made.

Many financial experts say that paying yourself first through direct debit savings plans for life events, such as retirement savings plans or a home down payment fund and an emergency fund, is the only way to ensure that saving gets a priority.

Next, add realistic amounts for variable but necessary expenses such as food, transportation, home maintenance and clothing. Again, calculate to see how much income is left.

Dealing with credit debt needs to be a priority to reduce interest and service fees.

From the liability list, identify the smallest debt. Make regular or minimum payments on all of the debts but on the smallest debt add any available extra funds to pay off the debt as quickly as possible. Once it is paid, use the payment amount and extra funds to pay down the next debt.

Continue doing this until all of the credit card debt has been paid off. These funds are now available to pay down larger loans or to add to the savings.

A key factor in reducing credit card debt is not adding to the debt by continuing to use the credit cards. Cut them up or lock them away for emergency use only.

If an emergency saving fund has been created, eventually the use of the credit card for emergencies should be unnecessary or else used and then paid off the total balance at the end of the month.

From the life event priority list, identify how much needs to be saved monthly to achieve the desired goals. Assess what funds had been saved in the past and identify if they are part of this saving goal.

Specialized savings options are available for many of the life event goals:

  • Registered Retirement Savings Plans allow the interest to accumulate untaxed until the money is withdrawn at retirement. These funds can also be used to purchase a new home.
  • Tax-free savings accounts and registered education saving plans are also for long-term saving goals and are usually invested in a long-term higher earning account or mutual fund.

For shorter-term goals such as a new computer, holiday or an emergency fund, the money may be kept in a savings account or money market fund for quick access.

Once the savings, fixed and variable expenses have been added to the spending saving plan, decide on the flexible expenses. Will some of them be eliminated or drastically reduced?

Calculating how much is spent on each item per month may help to identify changes. Could this money be better used to reduce debt or increase savings for desired goals?

Re-assess the spending saving plan each month and make changes as necessary. A manageable spending saving plan is a tangible tool to assess how you are doing and how to make financial adjustments to meet changing needs and priorities in your life.

Paying yourself first is key to planning and saving for life events. Planning financially for life events and emergencies can make a difference in your lifestyle, financial security and in how you cope with life events.

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