It’s common knowledge that financial planning can often be extremely confusing and difficult to navigate. Here’s a tip to help: think about financial planning by narrowing it down to one question, “what course of action will help me maximize my standard of living – in the smoothest way possible – over the rest of my life?”
Without a financial plan, it’s likely that you’ll experience a lifestyle decline at some point. These declines can occur at various life moments, whether it’s putting children through school, retirement, or because of something unexpected.
When you rent your home, you have fewer financial responsibilities and upfront costs compared to someone who owns their home. It’s true that all of those costs and fees associated with homeownership can eat into a good chunk of savings or liquidity. While renting may offer more mobility and often less financial commitment, there is no opportunity for wealth creation in the long term. Financial planning while you’re renting requires you to be meticulous and disciplined in order to achieve all of your goals.
Here are the top 3 things you need to do to reach your financial goals while you’re renting:
1. Make it automated
While you’re enjoying the flexibility of your rental agreement, you’re paying monthly rent to a landlord who is building equity through home ownership. When it comes to renting, there is no financial relief later on in life like there is with home ownership. Reverse mortgages, Home Equity Lines of Credit (HELOC) and other mortgage strategies provide support to homeowners as they grow older.
Because of this, your assets are your main investments. Building up your net-worth in liquid investments in a more flexible way than having it tied into a house can be a major benefit of this.
However, this also means that you have to be incredibly disciplined not to dip into your investments for any large purchases. By being diligent, organized and having a good pulse on your current financial situation you’ll be more likely to stick to your plan and reach your goals without having any hiccups along the way.
Setting up a pre-authorized contribution (PAC) is the best way to make your investments automated. This means that each month you will have a set amount of money that leaves your bank account automatically each month to go into building up your investments.
2. Look at your finances holistically
A lot of people tend to hyper-focus on the “fun stuff” when it comes to financial planning – investments that could make you rich. However, investments are truly only one piece of the pie. Especially when you’re renting, and you don’t have the financial security of home equity to fall back on, there are other parts of your financial plan to ensure are in place to protect if anything goes awry.
There are 3 parts of your financial plan that you need to consider:
1. Investments
Growing your net-worth is extremely important as a renter. When looking at your investments you have to think about exactly how much money will you need in the future. How much should you be automatically investing each month to get there? What type of investment accounts will lead to the maximum after-tax income when you need the money?
2. Insurance
What types and amounts of insurance policies are required so that, even if there is an accident, illness, or death in your household, there will still be enough money to ensure everyone continues to maintain their lifestyle? For example, working people need to insure their earning power, and parents need to make sure their kids are financially taken care of if anything were to happen.
3. Borrowing
How much of your monthly cash flow is going towards debt? Can that debt be made less expensive? If so, how can the monthly savings be used to build and protect your wealth?
3. Stay the course
Once you have looked at all three aspects of your financial plan, and done everything you can to automate as much of it as you can, staying the course is essential. Think of your financial plan as a long-term play. You’re not looking to make any quick gains or pick a “winning stock” – this is how people go off course and often end up into trouble.
We’re not saying that financial planning is a one-time, “said it and forget it” practice. Revisiting and updating your financial plan is also essential to reaching your goals. For example, if you have children, get married, or switch careers, you need to make the necessary adjustments to your plan.
At Planswell, we recommend that people update their financial plan every six months just to ensure that your plan is as accurate and reflective of your current situation as it can be.
While every piece of advice here will help you reach your financial goals, the one overarching theme is to work towards your goals as soon as possible. You know that saying about the best time to plant a tree was 20 years ago, and the second best time is now? Same notion works with your finances. Getting started is often the hardest but best step.
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