Does Creating a Financial Plan Feel Too Grown-up?

Confession: I wasn’t always a member of the “strategy” choir. I was more in the camp of “not having a plan is a plan.”

Sure, I was goal-driven and action-oriented, but all with the mindset that “it’ll all work out.” Having a formal plan and strategy felt too constraining for my free spirit.

Eventually, I learned that creativity actually thrives with a degree of constraint.

You may not be a self-described free spirit. But I bet there’s some aspect of your financial life that you resist planning and creating a strategy for. And, I want you to know I TOTALLY get it!!

However, combating this resistance is necessary. Especially if you want to experience sustainable success (not to be confused with a straight trajectory, by the way).

This is precisely why I’m such an advocate for having a financial plan and strategy – it’s the combination that gives your money direction. It’s how you “tell” your money what it is you want it to do for you and when.

It’s also precisely why at this time of year (open enrollment) I make a clarion call to remind you to pay attention to your 401(k).

From what I’ve observed, this is the area of your financial life that tends to be on the back burner and gets the least amount of love from you. Think about it: When was the last time you really thought about your 401(k)?

Was it when you first joined your employer and made your mutual fund selections?

Was it when you read last week’s post about the perils of operating on automatic pilot?

Was it when you tapped out all your other savings accounts, but needed some cash? So, you borrowed from yourself.

Was it this past August when the market dropped 1,000 points in a single day? And you panicked because the market value of your account dipped.

It’s okay that you don’t think about your 401(k) all the time. After all, it is a long-term investment.

But treating it as an after-thought isn’t too smart, either.

So, let’s take a look at two (2) key decisions that define your 401(k) strategy and plan. If you can, as you read this, pull your 401(k) investment statement. I want you to review it with these two key decisions you need to make in mind. The ones you shouldn’t leave to chance or make unwittingly by default – but likely did.

Probably because you either lacked the knowledge and didn’t know any better. Or, because you thought the process you’d need to use to make these decisions would be too time-consuming.

Decision #1 – Your strategy

Determine if you will invest in target-date funds; actively-managed funds; or index funds.

Target date funds are as their name implies: These mutual funds consist of stocks, bond, cash, and other types of securities; the allocation of which depends upon the future date. A target date fund of 2025 would have a different structure than one with 2050.

Actively-managed funds are managed by a person or team of persons who select the underlying securities (of stocks, bonds, cash or other types of securities) with a specific goal in mind.

Index funds represent a passive form of fund management. This type of fund is constructed to match or track it’s target index, e.g., the Standard & Poor’s 500 Index.

The first key decision you need to make is this: Will you invest in all three types, a combination, or just one. (A personal note: I am not a fan of target date funds.)

Decision #2 – Your plan

Select the mutual funds that will comprise your portfolio.

If your employer is like most, you have anywhere from 10-40 (maybe more) mutual funds as options from which to select! Choice is good because as your elders advised you should never put all your eggs in one basket. The same principle applies here, too. But having too many options often makes it hard to choose, smartly.

Your second key decision is to select the concatenation of mutual funds that are inline with your strategy. And, they should reflect what will help you achieve your goals in the time-frame with which you’re working.

With so many options, choosing can be a bit tricky at first. Because not all funds are created equal, you need a way to filter the good from the bad and the ugly. Don’t worry…I’ve got you covered!

On Wednesday, November 11th at 8pm ET, I’m hosting a free webinar to walk you through the list of 7-criteria for selecting the mutual funds to have in your 401(k); how to use these criteria to design a diversified portfolio; and how to use these very same criteria to avoid the common mistake of operating on autopilot.

Are you ready to “tell” the money you’ve designated for retirement what you want it do for you? How much you need it to grow by and by when? If so, then the above are two key 401(k) decisions you need to make.

They are important because they serve as the foundation for your investment strategy. Dismiss this part of the process and it’s like building a house on a foundation of sand — not good!

Click here if you want to join us and learn how to identify the criteria for selecting the mutual funds to have in your 401(k).

 

p.s. And don’t forget about “What the H*ll Should I Do With My 401(k)?” Click here to register for this 3-part interactive training if you want to get better results from your 401(k) mutual funds.

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