Simplifying Financial Planning: From a Financial Advisor

In theory, financial planning may seem straightforward. But in practice, emotions can make it tricky at times—especially when markets fluctuate. It’s common to second-guess your investment decisions when times get tough.

The good news? You may be able to sidestep some of these mental roadblocks by structuring your finances into three key categories: emergency savings, protection, and growth potential. Thinking about your financial plan this way can potentially help you handle unexpected costs. It may also help protect your assets and keep you focused on your long-term goals.

Why Categorizing Your Money Can be Beneficial

It Can Help Make Big Goals Feel More Manageable

Breaking major financial goals into smaller, achievable steps may make them easier to reach. Instead of seeing retirement savings as one big challenge, consider setting smaller goals. For example, aim to save one year’s salary by age 30 or three times your salary by age 40.

It Can Help Create a Clearer Mental Picture

When you assign a specific purpose to your savings, you may be less likely to spend that money impulsively. Keeping your emergency fund, investment savings, and daily spending money separate may help avoid financial confusion. This may also help you focus on your long-term goals.

Giving your accounts meaningful names could also be beneficial. Instead of just “Savings,” consider labeling it something personal like “Future Dream Home” or “Adventure Fund.” These emotional connections may help reinforce good financial habits.

The Three Pillars of a Strong Financial Plan

Emergency Fund: Your Safety Net

Life can be unpredictable, so it's helpful to have some cash available for unexpected expenses. A good rule is to save three to six months' worth of essential expenses. If that feels too hard, consider starting with a smaller goal. You could aim for $1,000 or one month’s expenses. Then, you can build from there.

Protection: Securing What You Value

Beyond savings, protection can include things like life insurance, income protection, and strategies to manage market risks. Early in life, this might mean focusing on life and disability insurance. As your finances improve, you might want to look into long-term care insurance or estate planning. This may help protect future generations.

Growth: Building Wealth for the Future

Once your emergency fund is in place and your key protections are covered, consider shifting your focus to investing for long-term growth. Diversified investments have the potential to help your money keep pace with inflation and grow over time. Finding the right balance between risk and reward—based on your financial goals and time horizon— may help to ensure that your investments work for you.

Bringing It All Together

Segmenting your financial life into these three categories may help give you a clearer picture of how your money works together. Having emergency cash saved and the right protections may help you stick to your investment plan. This can be true even when markets become unstable.

Once you’ve established a strong foundation, consider refining each category to fit your needs. For instance, if stock market fluctuations make you nervous, boosting your emergency fund may give you more peace of mind. If your family relies on your income, prioritizing life and disability insurance can provide financial security.

And remember, you don’t have to figure it all out alone. A financial advisor can help you create a plan that aligns with your goals and helps you build confidence in your financial future.

Sources:

https://www.fidelity.com/learning-center/trading-investing/emergency-protection-growth

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.