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Finance Lifestyle

How to Create a Financial Plan in 11 Steps

Structure is the key to growth. Without a solid foundation — and a road map for the future — it’s easy to spin your wheels and float through life without making any headway. Good planning allows you to prioritize your time and measure the progress you’ve made.

That’s especially true for your finances. A financial plan is a document that helps you track your monetary goals to measure your progress towards financial literacy. A good plan allows you to grow and improve your standing to focus on achieving your goals. As long as your plan is solid, your money can do the work for you.

Thankfully, a sound financial plan doesn’t have to be complicated. Here’s a step-by-step guide on how to create a financial plan. 

What Is a Financial Plan?

Financial planning is a tangible way to organize your financial situation and goals by making a roadmap to achieve them. When determining where to start, you should consider what you currently possess, your long-term goals, and what opportunity costs you’re willing to take on to meet your money goals.

Financial planning is a great strategy for everyone — whether you’re a budding millionaire or still in college, creating a plan now can help you get ahead in the long run. If you want to make a roadmap to a successful future, here’s how to create a financial plan in 11 steps. 

1. Evaluate Where You Stand

Building your financial plan is similar to creating a fitness program. If you don’t have exact steps to reach your goals, you could end up doing random exercises without making progress. To create a successful plan, you first need to understand where you’re starting so you can candidly address any weak points and create specific goals. 

Determine Your Net Worth

One way to figure out your financial status is to determine your net worth. To do this, subtract your liabilities (what you owe) from your assets (what you own). Assets include things like the money in your accounts and your home and car equity, while liabilities can include any debt, loans, or mortgages. Here’s how to calculate your net worth using your assets and liabilities.

Determine your net worth by subtracting your liabilities from your assets.

Your ratio of assets to liabilities may change over time — especially if you pay off debt and put money into savings accounts. Generally, a positive net worth (your assets being greater than your liabilities) is a monetary health signal. You should regularly keep track of your net worth to monitor the trajectory of your financial plan.

Track Your Spending

Another way to evaluate your financial planning process is by measuring your cash flow, or how much you spend compared to how much you earn. Net worth is a great way to understand where you stand financially, but measuring cash flow is how you might ensure you’re heading in the right direction.

Negative cash flow means that you’re spending more than you make, leading to things like credit card debt and bankruptcy. Conversely, positive cash flow means you’re earning more than you’re spending — which is an excellent step towards achieving your money goals. 

Now that you have an idea of your net worth and cash flow, it’s time to set your financial goals. 

2. Set SMART Financial Goals

By setting SMART financial goals (specific, measurable, achievable, relevant, and time-bound), you can put your money to work towards your future. Think about what you ultimately want to do with your money — do you want to pay off loans? What about buying a rental property? Or are you aiming to retire before 50?

Start by putting together a list of your goals and dreams, from running a doggy daycare to living in Paris. Even if it feels outrageous, your financial plans should help you work towards your long-term goals.

SMART goals help you break down your more extensive financial planning process into actionable pieces. Remember that dream to move to Paris? Using SMART goals, you may make your dream to live on the Seine a reality. Here’s how to get started creating your SMART goals:

SMART goals are specific, measurable, achievable, relevant, and time-bound.

Setting concrete goals may keep you motivated and accountable, so you spend less money and stick to your budget. Reminding yourself of your monetary goals may help you make smarter short-term decisions to invest in your long-term goals. 

It’s important to understand that your goals aren’t static. When your life goals change, your financial plans should follow suit.

3. Update Your Budget

Creating a budget may help you determine how to create a financial plan and achieve your long-term monetary goals. When you create a budget and stick to it, you can understand what areas you might afford to spend and where you should be saving. 

An excellent method of budgeting is the 50/30/20 rule, popularized by Senator Elizabeth Warren. To use this rule, you divide your after-tax income into three categories: 

  • Essentials (50 percent)
  • Wants (30 percent)
  • Savings (20 percent)

Pie graph shows how you can break down your budget with the 50/30/20 rule.

The 50/30/20 rule is a great and simple way to achieve your financial goals. With this rule, you can incorporate your goals into your budget to stay on track for monetary success. 

No matter what financial goal you’re working towards, it’s essential to have an updated budget and plan to achieve it. For example, if you’re planning for a wedding, you might eat out less to reduce your grocery budget each month.

What to Include in Your Budget

If you’ve ever tried to put together a budget, you’ve likely considered the basics like rent, loans, and groceries. But what other expenses should you consider? Over time, those daily lattes may start to add up — which is why it’s crucial to think about the many different costs you could incur during the month. When updating your budget, here are some of the most common items to include:

  • Rent
  • Groceries
  • Dining out
  • Household maintenance
  • Emergency fund
  • Subscriptions and memberships
  • Travel and transportation
  • Prescriptions
  • Bank account fees
  • Car registration or lease
  • Pet costs
  • Entertainment
  • Clothing
  • Personal care
  • Charity

So you know what you need to include in your budget. Now what? Check out our budgeting tips to get smart about creating your budget in line with your financial plan. If you’re ready to get the ball rolling on your future, try using a spreadsheet, a piece of paper, or a budgeting app to create your financial plan today. 

4. Save for an Emergency

Did you know that four in 10 adults wouldn’t be able to cover an unexpected $400 expense? With so many people living paycheck to paycheck without any savings, unexpected expenses might seriously throw off someone’s life if they aren’t prepared for the emergency. 

It’s important to save money during the good times to account for the bad ones. This rings especially true these days, where so many people are facing unexpected monetary challenges. Whether you’re just starting on your path to financial literacy or have been saving for years, it’s good practice to review your emergency finances to ensure they would adequately cover your current needs. 

You already know you should be storing away money in case something goes wrong. But did you know that you should be saving for both a rainy day and emergency fund? It’s important to have multiple backup funds to hold you over in case of an unexpected crisis. 

5. Pay Down Your Debt

It can be frustrating to allocate your hard-earned money towards savings and paying off debt, but prioritizing these payments can set you up for success in the long run. With two significant methods of paying off debt, it’s essential to understand the difference between them so you can make the smartest decisions for your financial future. 

A chart shows the differences between debt snowball and debt avalanche repayment. Debt snowballs start with the smallest, while the avalanche method targets the highest interest loans.

No matter the debt repayment option you choose, the key to successfully paying down debt is to be disciplined with your budget. Skipping even one or two months of debt repayments may throw a wrench in your financial plans, so it’s essential to create a realistic budget that you can stick to. 

6. Organize Your Investments

Investing may seem like a difficult topic to navigate, but you can put your money to work and passively grow your wealth when you understand the basics. To start investing, you should first figure out the initial amount you want to deposit. No matter if you invest $50 or $5,000, putting your money into investments now is a great way to plan for financial success later on. 

When deciding how to create a financial plan, you should consider budgeting a set amount each month to go directly into your investment portfolio — this will be your contribution amount. Over time, those small bits of money may begin to grow into increasingly larger sums. However, it’s important to note that investing is a long game. If you want to see serious results, you’re going to have to wait for at least five or more years. 

Ready to get started on your path towards long-term financial success? Check out our investment calculator to create goals, forecast metrics, and find opportunities to grow your wealth even further. 

7. Prepare for Retirement

When thinking about how to create a financial plan, it’s crucial to consider your goals far in the future. Although retirement may feel a world away, planning for it now is the difference between a prosperous retirement income and just scraping by. 

The earlier you can start saving for retirement, the better. If you start saving for retirement in your 20s, you’ll have 30+ years of consistent contributions to your funds by the time you retire. Generally, the older you are, the more you should try to contribute to your retirement fund. However, a good rule of thumb is to save around 10–15 percent of your post-tax income annually in a retirement savings account.

Retirement Plan Types

There are several types of retirement savings, the most common being an IRA, a Roth IRA, and a 401(k):

  • IRA: An IRA is an individual retirement account that you personally open and fund with no tie to an employer. The money you put into this type of retirement account is tax-deductible. It’s important to note that this is tax-deferred, meaning you will be taxed at the time of withdrawal.
  • Roth IRA: A Roth IRA is also an individual retirement account opened and funded by you. However, with a Roth IRA, you are taxed on the money you put in now — meaning that you won’t be taxed at the time of withdrawal.
  • 401(k): A 401(k) is a retirement account offered by a company to its employees. Depending on your employer, with a 401(k), you can choose to make pre-tax or post-tax (Roth 401(k)) contributions. 

A chart shows the difference between IRA, Roth IRA, and 401K retirement options.

8. Start Your Estate Planning

Thinking about estate planning isn’t fun — but it is important. When figuring out how to create a financial plan, it’s crucial to start estate planning to outline what happens to your assets when you’re gone. 

To create an estate plan, you should list your assets, write your will, and determine who will have access to the information. Estate taxes can run up to a steep 40 percent, so having a plan for how to set up your estate may ease the financial burden of your passing on your loved ones. 

Using a Lawyer for Estate Planning

Using a lawyer for estate planning can solidify financial plans that you don’t want to leave to chance. By clearly outlining your estate plan, you can protect against potential legal battles or missteps that could occur when sorting out your estate. If you plan to use a lawyer for estate planning, here’s what you need to know:

  • Find an estate planning specialist: Just like doctors, lawyers specialize in all different fields. You wouldn’t expect a dermatologist to be performing knee surgery, so why would you expect a lawyer with a different specialty to create your estate plan?
  • Clarify legal fees: Estate planning fees may vary dramatically depending on the lawyer and your specific needs. Some lawyers charge based on the complexity of the plan; others charge a flat or hourly fee. There is no right or wrong with estate planning fees, but you should have an upfront conversation with your lawyer to determine which method would work best for you.
  • Find a lawyer you trust: Estate planning is a very personal matter, so you should find a lawyer with whom you feel comfortable sharing personal matters. 

9. Insure Your Assets

As your wealth grows over time, you should start thinking about ways to protect it in case of an emergency. Although insurance may not be as exciting as investing, it’s just as important. 

Insuring your assets is more of a defensive financial move than an offensive one. When determining how to create a financial plan, you want to have insurance to protect yourself from any unforeseen difficulties that could hinder your success. 

Types of Insurance

There are several types of insurance you might get to protect your assets. Here are some of the most important ones to get when planning for your financial future. 

  • Life insurance: Life insurance goes hand in hand with estate planning to provide your beneficiaries with the necessary funds after your passing.
  • Homeowners insurance: As a homeowner, it’s crucial to protect your home against disasters or crime. Many people’s homes are the most valuable asset they own, so it makes sense to pay a premium to ensure it is protected.
  • Health insurance: Health insurance is protection for your most important asset: Your life. Health insurance covers your medical expenses for you to get the care you need. 
  • Auto insurance: Auto insurance protects you from costs incurred due to theft or damage to your car.
  • Disability insurance: Disability insurance is a reimbursement of lost income due to an injury or illness that prevented you from working. 

10. Plan for Taxes

Taxes can be a drag, but understanding how they work can make all the difference for your long-term financial goals. While taxes are a given, you might be able to reduce the burden by being efficient with your tax planning. When planning for taxes, it’s important to consider:

  • How to reduce your taxable income: You can capitalize on tax savings investment options like a 401(k) or 403(b) to help you save money by reducing your taxable income (while putting more money away for your future). 
  • How to itemize your deductions: Tax deductions are a way to lower taxable income as a full- or part-time self-employed taxpayer. You can deduct incurred expenses from doing business to reduce your taxable income. 

11. Review Your Plans Regularly

Figuring out how to create a financial plan isn’t a one-time thing. Your goals (and your financial standing) aren’t stagnant, so your plan shouldn’t be either. It’s essential to reevaluate your plan periodically and adjust your goals to continue setting yourself up for success. 

As you progress in your career, you may want to take a more aggressive approach to your retirement plan or insurance. For example, a young 20-something in their first few years of work likely has less money to put into their retirement and savings accounts than a person in their mid-30s who has an established career.

Staying updated with your financial plan also ensures that you hold yourself accountable to your goals. Over time, it may become easy to skip one payment here or there, but having concrete metrics might give you the push you need for achieving a future of financial literacy. 

After you figure out how to create a monetary plan, it’s good practice to review it around once a year. However, this is just a baseline metric, so checking it more often may be necessary if a significant life event occurs. 

It’s always a good idea to reevaluate your financial plan if you get married, have kids, or quit your job. Every few months or so, take some time to look at your progress and assess problem areas. Take the time to celebrate milestones — it may help motivate you going forward.

Ask for feedback on your financial plan from people who know you. Your best friend might point out some things you’d forgotten about, like your desire to get a dog or live in a downtown loft. You can also run it by a professional, who can provide some objective insight and professional wisdom on how to create a financial plan.

It’s important to remember that the journey to financial success is a personal one, and should be taken at your own pace. However, the earlier you get started, the more prepared you may be for a strong financial future. Download Mint to get started taking control of your finances today.

Sources: CNBC | Federal Reserve | IRS | IRS

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Finance Lifestyle

Self-compassion: The only thing holding you back from mastering your money

Regardless of how much experience you have with managing your finances—be it decades or days—a common psychological challenge I see when it comes to managing money is low self-esteem. Psychological research suggests that people with high self-esteem focus on growth and improvement, whereas people with low self-esteem tend to focus on not making mistakes in life. So, the key challenge for most when it comes to managing money is figuring out ways to boost self-esteem so that growth and improvement can happen.

This is where self-compassion comes in. Self-compassion is the act of being less critical of yourself and potential shortcomings. It’s also a form of optimism that takes shape by giving yourself permission to relax a little bit. In fact, I would argue that self-compassion is not only a key skillset for financial improvement, but also for overall quality of life. Here are five strategies for practicing self-compassion today:

#1 Daily positive affirmations

Self-encouragement can go a long way when it comes to boosting self-esteem, however, sometimes positive affirmations can backfire for people with low self-esteem, which is why it’s important to build yourself up in a realistic and authentic way. Instead of waking up and telling yourself, “I’m going to be a millionaire”, try something more like “I am resilient and I’m going to get through tough financial times.”

Pro tip: Write down your affirmation on a piece of paper and tape it to your bathroom mirror. You can read it to yourself as you’re getting ready for the day.

#2 Make a list of past financial achievements

The best way to challenge the negative voice inside your head is to use facts to disprove your beliefs. Past financial achievements are proof that you have what it takes to be financially successful. Don’t worry so much about the quantity of achievements, and whatever you do, don’t give someone else credit for your achievements. Even if someone helped you out financially, YOU were the one who asked for help. YOU were the one motivated to make the change. Don’t forget that.

Pro tip: Document your achievements in a financial journal or diary. Be sure to look at your achievements list from time-to-time as a reminder of your success and a quick self-esteem boost.

#3 Be your own best friend

Have you ever noticed how easy it is to be kind to a friend when they’re feeling down or having a bad day? It’s possible to do the same for ourselves. If you’re like me, you may make the initial mistake of thinking that being kind to yourself will force you to lose your edge, but it’s just the opposite! Remember that high self-esteem is related to growth…and growth means success, so believe it or not, people who are successful have a keen ability to bounce back faster after a setback because they aren’t as hard on themselves.

Pro tip: Use a financial journal or diary to vent about a financial problem you’ve encountered.  Now pretend to be one of your best friends and write down the advice you think they’d give you.

#4 Ask for advice and welcome compliments

One of the underlying problems when it comes to financial management is a lack of feedback. Think about other life domains: work, school, sports, hobbies, and relationships. What they all have in common are mentors! Managers, teachers, coaches, experts, and partners are often there for us providing feedback and sometimes praising us when we’re doing well. With money management, on the other hand, most of us don’t have an expert or coach to get feedback about our performance. I highly recommend paying for at least one financial advising session to find out what you’re doing well. Be open to getting feedback about areas to improve, but really soak in and acknowledge the compliments about what you’ve achieved so far.

Pro tip: I’d recommend hiring a Certified Financial Planner (CFP®), someone who is more interested in looking at how you organize your money. If a CFP® isn’t within your budget, consider talking to a trusted friend or family member about your high-level financial goals and the progress you’ve made so far (no need to discuss specific numbers if you don’t feel comfortable).

#5 Don’t let your net worth define your real worth

If you’re struggling with low self-esteem I caution you when looking at your net worth. I’m not saying live in ignorance, but what I am saying is that it’s extremely unfair to let a single number define who you are. At Mint, our intent is not for you to see the net worth number and feel like you are worthless. The real intent is to use your net worth as a starting point for creating financial improvement goals. That being said, seeing it without context can do damage to your ego and work against your goal of improved self-esteem. To counter this feeling, I recommend writing down a list of qualities that make you good at managing your finances.

Pro tip: Look for clues in other areas of your life that have helped you save money and earn money. Perhaps it’s that you’re really organized so you end up paying your bills on time, or that you’re a good chef so you don’t eat out a lot which helps you save money.

If you’re struggling with low self-esteem, know that you’re not alone. Give these five strategies a try, and let me know if you notice a difference in your ability to be more self-compassionate.

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Finance Lifestyle

I Dropped Out of College: My Student Loan Repayment Options

No one intends to drop out of college. If you show up to campus for your freshman year, chances are you plan to graduate in four years and use your degree to land a job. Maybe you even have the whole thing mapped out, step-by-step.

But then life happens. Whether it’s a family emergency, deteriorating health, stress burnout, or just the realization that college isn’t the right choice, plenty of people choose to drop out of their university every year. The problem is, your student loans don’t go away just because you never ended up with a degree.

So how should someone in this position approach student loan repayment? Are there any unique considerations to take into account? Here’s what you need to know.

Choose an Income-Based Repayment Plan

If you have federal student loans, you’re eligible for the same repayment options available to borrowers with a degree.

You may currently be on the standard 10-year repayment plan, which will have the highest monthly payments and the lowest total interest. You have the option of switching to a less expensive option if you’re struggling with those payments. Use the official repayment calculator to see which plan lets you pay the least.

When you choose an extended, income-based, or graduated repayment plan, you’ll pay more interest overall than if you stuck with the standard plan. If you’re not working toward a specific forgiveness program, then it’s best to switch back to the standard plan as soon as you can afford it to minimize the interest.

Refinance Private Loans

Private student loans have fewer income-based repayment options than federal loans, and they rarely offer deferment or forbearance options. But you can refinance private loans for a lower interest rate, even if you dropped out.

There are a few lenders that service borrowers with uncompleted degrees.

These may include:

  • MEF
  • RISLA Student Loan Refinance
  • EDvestinU
  • PNC
  • Wells Fargo
  • Purefy
  • Discover Bank
  • Advance Education Loan
  • Citizens Bank

To be a good candidate for a student loan refinance, you must have a high credit score and no recent bankruptcies or defaults on your credit report. You also need a low debt-to-income ratio, and some lenders may have income requirements.

Financial aid expert Mark Kantrowitz of SavingforCollege.com said borrowers are unlikely to be good refinance candidates immediately after college because lenders usually require a minimum amount of full-time employment.

If you dropped out recently, you may want to wait a year before trying to refinance private loans. During that time, check your credit score through Mint, pay all your bills on time, avoid opening new loans or lines of credit, and pay your credit card bill in full every month.

Explore Deferment and Forbearance

Once you leave school, you’re eligible for a six-month grace period where federal student loan payments are put on hold. You won’t accrue interest during this time if you have subsidized loans, but you will if you have unsubsidized loans.

If you still need more time after the grace period has expired, you can apply for deferment or forbearance. Borrowers have to apply for deferment and forbearance manually and wait to be approved.

Deferment and forbearance are both federal programs that let borrowers avoid paying their student loans while still remaining current. The main difference between the two options is that interest will not accrue on your loan balance during deferment, but it will accrue during forbearance. For that reason, it’s harder to qualify for deferment.

Be careful about putting your loans in deferment or forbearance for a long time. The interest that accrues will capitalize, meaning it will be added to your loan’s principal. This will increase your total monthly payments and could delay your debt payoff timeline.

Apply for Public Service Loan Forgiveness

Public Service Loan Forgiveness (PSLF) is a program that encourages borrowers to choose a non-profit or government job. In exchange, your remaining loan balance will be forgiven after 10 year’s worth of payments, which do not have to be consecutive. It’s even available to borrowers who dropped out and never finished a degree.

“PSLF is always an option because it’s employer-dependent,” said student loan lawyer Joshua R. I. Cohen.

PSLF is only available for federal loans, and only those loans that are part of the Direct Loan Program. If you have FFEL or Perkins loans, you’ll have to consolidate them as part of the Direct Consolidation Program. This process will render them eligible for PSLF.

Be sure not to consolidate loans that are already part of the Direct Loan Program. If you’ve already been making payments, consolidating loans will restart the clock on PSLF, and you could lose credit for eligible payments you’ve already made.

The employer you work for must also be an eligible non-profit or government entity. Only full-time employees qualify for PSLF, which excludes part-time workers and independent contractors.

To be eligible for PSLF, you should fill out the employment certification form every year. This form asks for your employer’s contact information, your employment status, and more.

Once you submit the form, you should receive a notice verifying your employer and how many eligible payments you’ve made. Doing this every year will make it easier when you apply for forgiveness after your 120 payments have been made.

“It also gives borrowers an opportunity to dispute any errors or undercounts well before they reach eligibility for loan forgiveness, giving them plenty of time to address disputes,” said student loan lawyer Adam S. Minsky.

Borrowers can save money while working toward PSLF by choosing an income-based repayment plan instead of the standard 10-year plan. They also won’t owe taxes on the forgiven amount, so it’s best to choose the least expensive monthly option.

Try to Discharge Your Loans

If you couldn’t complete college because the department you were studying in closed, or your school committed fraud, you may be a good candidate for discharging your student loans completely. If this happened to you, contact a student loan lawyer who can help you file a case.

 

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Finance Lifestyle

How to Use the OKR Framework to Reach Your Life Goals

The OKR framework is a method used to bridge the gap between strategizing and executing ambitious business goals, but it can be used for personal goals too. OKR, which stands for “Objectives and Key Results,” has revolutionized the way the corporate world approaches goal-setting. OKR allows teams to focus on big picture outcomes and achieve more than the team thought possible, even if they don’t completely attain the original goal.

Since the late 1990s, thousands of organizations and Fortune 500 companies worldwide have implemented the OKR framework to improve both team and individual performance, and increase their bottom lines. What if you could use these same principles to achieve your personal goals? It’s definitely possible to apply the OKR framework in a non-business context to map your future success.

In the same way that OKR allows companies to “work with purpose,” this framework can help you set purpose-driven goals in every area of your life. When it comes to your personal and financial goals, OKR can help you work towards living your dream life. We share how OKR can apply to your life in a non-business context and actionable tips to maximize its principles. First, let’s cover the basics of OKR.

Jump to our infographic, or keep reading for a more in-depth description.

What Is the OKR Framework? How It All Started

Before setting your own personal goals, it’s important to understand the context of OKRs’ development to understand its impact. The idea of OKR started gaining traction in the ‘90s after Andy Grove taught the principles to John Doerr, who both worked for Intel.

Doerr formalized the teachings of the OKR framework and went on to pen the popular book Measure What Matters. The OKR framework is broken down into an objective that inspires action, key results that measure progress towards that objective, and initiatives that allow the key results to come to fruition. When Doerr introduced OKR to Google’s founders Larry Page and Sergey Brin in 1999, the duo used it to drive the tech giant’s success. To this day, it’s used by Google and countless other companies to set corporate goals and track progress.

What Is the OKR Framework? How It All Started

Understanding Different Types of OKRs

When you’re creating OKRs to excel in your personal life, you have to be sure they fuel your ambitions while still being reasonable. Otherwise, it’s tough to use a business-oriented framework as a growth tool for your personal and financial goals. We’ve outlined four popular variations of OKRs here:

  • Committed OKRs

    • These OKRs are extremely attainable and eventually should be 100 percent achieved. The success of a committed objective usually has a direct impact on the quality of your life.
    • Example: Overhaul your personal time management system by the end of the month.
  • Aspirational OKRs

    • These OKRs are stretch goals with ideal outcomes that still seem somewhat impossible. They aren’t likely to be achieved during the first attempt but should remain on your personal OKR list until they are reached — no matter how long it takes.
    • Example: Start a side business based on a passion project.
  • Personal OKRs

    • Personal OKRs are the goals you focus on to make progress towards lifetime achievements and overall happiness. For example, you can start a new profession that gives you a sense of purpose if you’re not satisfied with your work life.
    • Example: Find a new job by the end of the year.
  • Financial OKRs

    • These personal finance OKRs should push you to make better financial decisions while also being achievable. Even if you’re heavily in debt and living paycheck to paycheck, you can tackle your financial goals one step at a time through the OKR framework.
    • Example: Build an emergency fund in six months.

Understanding Different Types of OKRs

Setting different types of OKRs is easy, but reaching them is the real challenge. It’s hard to believe 92 percent of people abandon their New Year’s Resolutions, but it’s a testament to poor goal setting. When you plan your future and finances with a reliable framework that excites you, you’ll improve your odds of succeeding at your goals.

5 Tips to Achieve Your OKRs

Objectives can be short-term goals that you knock out in a few months or huge goals that might roll over for years. At the end of a time period, a key result is either fulfilled or not. With this in mind, here are some best practices to keep in mind when tracking OKRs in your own life:

  1. Set and revise objectives frequently
  2. Don’t go after more than 3–5 OKRs per 3 months
  3. Strike a balance between an aggressive and achievable goal
  4. Give yourself a reliable tracking system
  5. Update your progress regularly

Organizations that don’t innovate or take enough risks lose in the long run. In the same way, not challenging yourself when setting personal goals can leave you feeling disappointed. A system like the OKR framework is a great way to set ambitious goals for yourself that are both feasible and rewarding.

OKRs empower individuals to improve their financial health and reach goals in the workplace through actionable, measurable steps. When you set meaningful OKRs, vague desires become concrete, attainable mini-goals. Using the OKR framework, a huge financial goal like saving for a down payment or funding your college tuition turns into a series of quantifiable, repeatable tasks that you can re-evaluate every few months.

5 Tips to Achieve Your OKRs

Let’s say you’re trying to increase your salary by earning a promotion or finding a new job. By setting OKRs, you’re forcing yourself to be realistic with your timeline for achievement. Instead of obsessing over getting promoted by the end of the year or increasing your salary by a certain dollar amount, you direct your energy towards the key results that will get you there.

When you’re systematic and practical about your goal-setting, you keep up your momentum and prevent demotivating disappointments. Check out our infographic below for some additional tips to effectively implement the goal-setting framework.

How to Use the OKR Framework To Set and Achieve Your Goals

In the simplest terms, objectives describe where you’re going whereas key results describe how you get there. Countless companies and even schools are using OKRs to level up — so why not apply this goal-setting technique to your personal goals? One of the most important aspects of the OKR framework to remember is that it’s designed to push you past your comfort zone to achieve greatness. In the same way that microlearning helps you break down a large goal, OKRs can help you split up a daunting task into more attainable ones.

Even starting small with a few budgeting objectives can change the trajectory of your life. You can lead a purpose-driven lifestyle that embraces failure as a necessary part of learning and growing. Don’t forget to check out our app to keep track of your purchases and address any spending habits.

Sources: Perdoo

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Finance Lifestyle

401k Early Withdrawal: What to Know Before You Cash Out

When it comes to making a 401k early withdrawal, there are a number of reasons why it might be tempting. With millions still unemployed due to the pandemic, unexpected expenses are taking a particularly hard toll. One reason why early withdrawal isn’t uncommon in the U.S. might be because it’s easy to assume you’ll have time to rebuild your 401k nest egg.

However, is the benefit of withdrawing your retirement savings early truly worth the cost? For many people, their 401k is their primary method of investing in their financial future. Before making a decision about early withdrawal, it’s important to consider the penalties and fees that could impact you. Read on to learn exactly what happens when you decide to dip into your 401k so you won’t be surprised by the repercussions.

How Much Are You Penalized for a 401k Early Withdrawal?

On the surface, withdrawing funds from your 401k might not seem like a bad option under extenuating circumstances, but you could face penalties. Young adults are especially prone to early withdrawals because they figure they have plenty of time to replace lost funds.

 

401k early withdrawal penalties

 

If you’re not experiencing a significant hardship, 401k early withdrawal probably isn’t the right choice for you. Ultimately, you could lose a substantial portion of your retirement savings if you choose to withdraw your 401k early to use the money to make other risky financial moves. Below, let’s delve further into the penalties that usually apply when you withdraw early.

1) Your Taxes Are Withheld

When you prematurely withdraw from your retirement account, your first consideration should be that you’ll have to pay normal income taxes on that money first. This means you’re losing at least roughly 30 percent of your savings to federal and state taxes before additional penalties.

Even if you only have $10,000 you want to withdraw, consider that you’re automatically giving $3,000 of your cash to the government. In the best case scenario, you might receive some money back in the form of a tax refund if your withholding exceeds your actual tax liability.

2) You Are Penalized by the IRS

If you withdraw money from your 401k before you’re 59 ½ , the IRS penalizes you with an extra 10 percent on those funds when you file your tax return. If we use the example above, an additional $1,000 would be taken by the government from your $10,000 — leaving you with just $6,000. If you’re 55 or older, you could try to get this penalty lifted by the IRS through the Rule of 55, which is designed for people retiring early.

Also, there are exceptions under the CARES Act, which is designed to help people affected by the pandemic. There are provisions under the act that state individuals under the age of 59 ½ can take up to $100,000 in Coronavirus-related early distributions from their retirement plans without facing the 10 percent early withdrawal penalty under certain conditions.

3) You Lose Thousands in Potential Growth

Even if you’re not deterred by tax penalties, think twice before you sabotage your long-term retirement savings goals. When you withdraw money early, you’ll miss out on potential future savings growth because you won’t gain the perks of compound interest. Compounding is the snowball effect resulting from your savings generating more earnings — not only on your principal investment but also on your accrued interest.

Also, if you make a 401k early withdrawal while the market is down, you’re doing yourself a disservice because you’ll be leaving thousands on the table. It’s unlikely you’ll fully recover the lost years of compound interest you would have benefited from. You might need to get creative with a passive income stream to help support you later in life.

 

tips to minimize 401k withdrawal penalties

 

When Does a 401k Early Withdrawal Make Sense?

In certain cases, it actually might be strategic to move forward with 401k early withdrawal. For example, it could be smart to cash out some of your 401k to pay off a loan with a high-interest rate, like 18–20 percent. You might be better off using alternative methods to pay off debt such as acquiring a 401k loan rather than actually withdrawing the money.

Always weigh the cost of interest against tax penalties before making your decision. Some 401k plans do allow for penalty-free early withdrawals due to a layoff, major medical expenses, home-related costs, college tuition, and more. Regardless of your strategy to withdraw with the least penalties, your retirement savings are still taking a significant hit.

401k Early Withdrawal, Hardship, or Loan: What’s the Difference?

Knowing the differences between a 401k early withdrawal, a hardship withdrawal, and a 401k loan is crucial. Due to the many obstacles to make a 401k early withdrawal, you may find you want to keep it untouched. If you’re convinced you still need to use your 401k for financial assistance, consult with a trusted financial advisor to figure out the best option.

When Does This Apply?

Taxes and
Penalties

Early Withdrawal

Your funds are withdrawn to pay off large debts or finance large projects. Your 401k fund is typically subject to taxes and penalties.

Hardship Withdrawal

You’re only eligible for this type of withdrawal under circumstances such as a pandemic or natural disasters. Withdrawals can’t exceed the amount of the need and the funds are still subject to taxes and penalties.

401k Loan

The loan must be paid back to the borrower’s retirement account under the plan. The money isn’t taxed if the loan meets the rules and the repayment schedule is followed.

Additional Considerations

If you’ve left a job and don’t know what to do with your Roth IRA, a 401k transfer is a good option. Most likely, you will save money and have a wider range of investment options when you transfer your funds. 401k fees can be high, and rolling over your funds to a Roth IRA account could be wise in the long run. Also, be aware that the process is more complicated for indirect rollovers. 

In Summary:

  • If you’re one of the millions of Americans who rely on workplace retirement savings, early 401k withdrawal may jeopardize your future financial stability.
  • There are very few instances when cashing out a portion of your 401k is a smart move.
  • In most cases, any kind of early 401k withdrawal is detrimental to your retirement plans.
  • Stick to your budget and bulk up your emergency fund to stay one step ahead.

In short, 401k early withdrawals are usually counterproductive. Prevent compromising your hard-earned savings by using a free budgeting tool that will set you up for success. After all, being prepared and informed are two of the most important parts of maintaining financial health.

Source: SEC

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