Got a Financial Plan?

If you do have a financial plan, you’re ahead of the game, as a recent Northwestern Mutual poll found that almost half of parents do not have one. I am guessing that one of the many perceived obstacles is uncertainty about the economy. Some may fear that a severe stock market downturn could wipe out hard-earned savings. Others, especially, young families, may find it difficult to find “extra” money to devote to sock away, with all the expenses of raising children.

I would argue that uncertainty should be a main source of motivation to develop a financial plan. If you invest in a diversified portfolio of companies with a solid track record, time is likely to reverse any “paper losses.” Remember: you do not lose a penny unless and until you sell.

As for finding disposable income in our budget to save and invest, the vast majority of us constantly purchase little things we do not really need. Those little expenditures add up quickly. For instance, if you save instead of sip a Starbucks latte every day (about $4 a pop last time I checked),  it would add up to $120. I show teens how they can save up for a new car in just 10 years by saving instead of spending on little things like coffee. They get it and I have heard many stories about how some have become avid savers and become interested in investing.

How might this work for parents? By brewing your own dose of cafeine and investing that $120 a month starting with the birth of your child, after 18 years, at 8% compound annual interest (less than the long-term historical average), you will have amassed almost than $58,000 — more than the current cost of a full year’s tuition and expenses at a pricey private university!

It is really not difficult to find dozens of places to cut back in ways that do not impact your comfort or standard of living. Many of us splurge on big and little indulgences several times a week, between downloading music, video games, electronic gizmos, clothes, or meals out.