August 29, 2016

Good financial plan starts by assessing values, goals

When it comes to financial planning and budgeting, both individuals and planners assume most people have the same values, needs and wants. To an extent, this is true. We all pass through similar life stages: childhood, young adult, early career, midcareer and retirement. However, our respective paths through these life stages vary greatly.

The fact is, the lives we lead are very different, and our needs are diverse. This makes our relationship with money unique, and financial plans and budgets should account for this.

A sound financial plan will account for your lifestyle as much as your life stage. Do you want to buy a house? Launch a business? Start a family? Travel the world? Retire early?

Understanding your goals and values will help you prioritize how you spend and save. It will also help you determine what matters most to you so you can set a realistic budget. For example, many people dream of retiring early. But what happens if you value recharging your batteries by taking a nice vacation with your family, the average cost of which is $4,700? Is it in the budget?

In my case, my husband and I celebrated making our final college tuition payment for our sons' education — which had been a priority. Then just when we thought we could move on to focus on saving more for retirement, our entrepreneurial son started a business and gave us the “opportunity” to invest.

The first life stage for young adults is often marriage. A recent study found the average wedding in 2015 cost $31,213. Today, some couples are deciding they do not want to spend that amount — or even a fraction of that amount. Instead, they are putting that money into savings or retirement accounts.

Another consideration is housing. A recent study from Zillow found that buying can be more affordable than renting; in fact, right now, the “breakeven” point, where home buyers end up financially ahead after buying a home, is just one year and six months in the Seattle-Tacoma-Bellevue area. In addition, mortgage interest rates are currently predicted to be at an all-time low.

Here are some things to consider if you are thinking about buying a house:

• saving for a down payment

• closing costs and taxes

• repairs and maintenance

• reputation of the community and school district

• building equity

If you are renting, you don't have the worries of repairs and maintenance, but you're also not building equity and gaining value from your payments. You are also limited by the types of home improvements you can make.

The final major life stage to plan for is retirement. The earlier you invest, the more your money will earn. For example, assuming a five percent rate of return, an initial $10,000 invested by a 20-year-old will grow to more than $70,000 by age 60. That same amount invested by a 40-year- old will only grow to $36,000.

If you're closer to retirement age, it's not too late to get your retirement plan on track. You can do this by maximizing your savings opportunities (tax laws are now in your favor), avoiding new debt, creating sustainable income, and considering long-term care insurance and other risk management strategies.

Executing your financial plan is about following a budget. But your budget needs to reflect your reality, or you won't be able to stick with it. So track all of your expenses and income for a month. More important, honestly assess your spending. Then think about your lifestyle, as well as your short- and long-term goals.

Does your current spending support these goals? If not, it's time to reevaluate your priorities and build a better plan. And remember, it is your plan. The more it reflects who you are and what you value, the more successful it will be.

Carol Nelson is KeyBank's Pacific Region executive and Seattle market president.