Creating a Financial Plan
JULY 28, 2017
Americans have been known to spend more time planning a vacation than planning for retirement — and who can blame them? It’s more fun to research B&Bs than to read about IRAs.
If you ignore your finances however, you might not be able to afford a vacation, let alone a comfortable retirement. Luckily, vacation planning and financial planning have more in common than you might think.
“A good financial plan is like a GPS,” says Chris Cook, founder and CEO of Beacon Capital Management. “It will tell you how to reach your goals in the most efficient way.”
Here are five financial lessons to be learned from vacation planning.
Financial and investment terms can sometimes sound like a foreign language.
Fortunately, just as travelers have their choice of translation apps, there are financial education resources you can tap.
Simple educational articles can help you brush up on topics like IRAs, 401(k) and other salary deferral plans, and 529 college savings plans. Tools such as the American Funds Retirement Planning Calculator can also help you assess whether you’re on the right retirement path.
Swimsuits. Sweaters. Shorts. Depending on your destination, you might need an assortment of clothes to cope with unpredictable weather or flight changes.
So, what types of investments should you pack?
Smart investing involves taking defensive measures to shield you from possible storms. By diversifying your portfolio, you can spread your risk and reduce the chance you’ll get motion sickness from big dips in your portfolio. Investing in mutual funds, which pool a variety of assets in one package, can help you hop on the diversification train.
Deciding how you’ll get to a vacation spot is an important part of your plan. Some travelers prefer to catch some sleep on a red-eye, while others opt to hit the road and take in the scenery. In the same way, choosing the right investments is a personal choice that should take into account your needs, risk tolerance and time horizon.
“Make sure you choose investments whose objectives match your personality and your goals,” says Christopher Gies, senior vice president, advisor education and sales force development at American Funds.
Think about the personal rate of return you’ll require to achieve your goals, adds Karen DeRose, president of DeRose Financial Planning Group. If you’re looking for potentially greater returns, you may need to take more risk. If your goals are modest, you may be able to take less.
“For instance, you may only need 5% returns to reach your objectives, so you can dial the risk down,” DeRose explains. "Someone with loftier objectives may need to dial the risk up."
Planning on your own may not be wise, especially if your vacation destination is off the beaten path. A travel agent can do the research for you, provide access to low fares or curate experiences that match your particular tastes.
Similarly, the right financial planner can help you manage investments, develop savings strategies and craft a retirement plan. In fact, a recent survey by the FINRA Investor Education Foundation found that more than half of investors with investments outside of their retirement accounts use a broker or a professional advisor to access investments that wouldn’t normally be available to them, and to help improve their investment returns.
“Charting your course is significantly easier when you have an experienced guide at your side in the form of a trusted financial professional,” says Ken Burdick, senior product specialist at American Funds.
Before booking your trip, it's important to determine how much you can afford to spend on everything from transportation to lodging. Those on a tight budget may choose a location closer to home.
When it comes to investing, mutual funds can be a low-cost way to get started. Some mutual funds require an initial investment of as little as $250 — that’s less than a night at many hotels.
As you research this year's vacation, set aside some time to map out your financial strategy as well. Whether it's for a weeklong getaway or a decades-long retirement, proper planning can help provide a payoff that will last a lifetime.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.