Sunday, September 21, 2008

What to do if your plan doesn't fit

Creating a financial plan is not always the liberating comforting experience that people hope it will be.  While for some it can be an exercise in reassurance that they are on the right path, for many others it can make their financial goals seem out of reach.  I hope that you are in the first category.  If are not, then please read on.

If the amount that you need to fund your retirement, your kids' education, a new car, and everything else in your plan adds up to more than you think you can possibly save, don't despair.  Just by knowing this, you are already closer to a more secure financial future than you were before.  Ignorance of your problems doesn't make them go away.  In fact, ignorance makes them grow larger - the longer you wait the more difficult it becomes to get your finances on track.  Therefore, by tackling your finances now, you are doing yourself a huge favor.

If you simply don't have enough money to meet your financial goals, you have only three options: earn more, spend less, or adjust your goals.  They all have advantages and disadvantages.

Earning more, if possible, is a great solution.  It should be easy to see how bringing in more money will help make your financial goals more possible.  However, if it were easy to bring in more money, you would probably be doing it already.  For most people, earning more money requires working longer hours or getting another or a different job.  If this is an attractive option for you, then by all means, go for it.

Spending less is a fantastic way to help you meet your financial goals.  The less you spend, the more you have to save.  Almost everyone can benefit from cutting back on their spending.  Once you start to trim your expenses, you might find that it is easier than you expected.  Many people worry that their "quality of life" will drop significantly when spending less.  Sure, you might miss the fun that your spending provided, but you will gain a great deal of satisfaction and security from knowing that your financial future is (or getting closer to being) on track.  Also, after cutting spending, many people come to realize that their "quality of life" depends less on material things and more on life's happy intangibles.  

Living a more frugal life not only increases the amount of money that you have to save, but it can often decrease the total amount that you need to save for retirement.  If you are able to cut your annual spending by a few hundred or few thousand dollars per year, that thriftiness should carry though into your retirement, and you will need less to achieve your retirement.

However, there is only so much money that you can cut out of your spending and it might not be enough to allow you to fully fund your goals.

If you cannot cut back on your spending enough to fund your goals and you are not in a position to increase your income, then you have only one option left: adjust your goals.  If you cannot or don't want to change your income or your spending habits then you will need to modify your goals.  Sometimes, this makes sense.  Perhaps if you delay your planned retirement date by a few years you will be able to live the retirement that you want without changing your current lifestyle.

Beware of making default changes to your goals by failing to plan.  Modifying goals often makes sense.  However, if you fail to save enough for your financial goals, you will not be able to achieve them.  You will, in essence, be forfeiting control of your financial life.  Perhaps your goals need to change.  However, make sure that you actively make that decision - decide what to change and by how much.  Don't let poor money management change your goals for you.

This is very simple in theory, but don't be fooled - it can be very difficult to put into practice.  If you don't have enough money to make your plan a reality, you need to either earn more, spend less, or adjust your plan.  Which ever decision you make, make it on purpose.

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