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Lifestyle planning: What it is and how to do it

At a glance:

Personal finance isn't just about stocks and bonds and charts and graphs. It's ultimately about how you use financial principles to make your life better—otherwise, it's just a bunch of useless data.

Lifestyle financial planning integrates psychological ideas into your financial situation, helping you craft a financial life that meets needs beyond mere dollar amounts. Ultimately, it's your money, and you want it to go where it does you the most good.

While money cannot buy happiness, budgeting to achieve your life's goals goes a long way toward achieving happiness. At some point, you must address the question: "What really makes me happy?"

What is lifestyle planning? Here are the basics

As society becomes more aware of each individual's special needs, techniques used in sociology and psychology are being applied to personal finance as well.

Lifestyle financial planning considers a person's desires, dreams, strengths, needs, and goals and fashions them into the overall financial equation in order to bring those goals within reach.

Lifestyle planning is about more than just money

Heretofore, planning has focused on maximizing the accumulation of wealth. Lifestyle financial planning, however, focuses on maximizing the individual's happiness. It de-emphasizes greed and embraces frugality. It also helps individuals focus on realistic goals based on their desires, dreams, strengths, and needs.

Many colleges, universities, and professional schools are implementing lifestyle planning counseling programs to help their students focus on what is important in both their personal lives and careers.

Lifestyle planning counselors help students make an inventory of those things in life that are important to them, such as where they want to live, the types of cars they want to drive, and the income they think they will need to support their lifestyles.

The types of things people typically save money for haven't changed, but the way they look at them has. For example, people still need to save for the down payment on a house, but perhaps a smaller house. Buying a car? Consider a previously owned luxury car or a lower-quality, brand-new one.

Or, when planning for college, it may make sense to go to community college for two years and then finish the degree program in a more prestigious school—it will cost a lot less.

Other things to think about

Very often life throws us curves. How many people do you know who wish they were in a different occupation or profession? What if your personal relationship doesn't work out? How will a breakup, separation, or divorce affect your lifestyle? Can you be financially prepared for it? You should be.

Lifestyle planning can help you reevaluate your personal choices and make decisions that will help you be happier and more productive. What about retirement? When planning for retirement, you need to consider what you really want to do. This will determine how much you need to save and how frugal you will need to be in order to plan for your retirement.

How to start your lifestyle plan

The first step in lifestyle financial planning is to make a list of your desires, dreams, strengths, needs, and goals. Then identify the financial goals associated with them. It might be helpful to use a written questionnaire to organize your thoughts.

Questions such as "Where would I like to live?" "What kind of car would I like to drive?" "What kind of clothes do I like to wear?" "Where would I like to work?" and "What do I like to do for entertainment and recreation?" can all be helpful in pinpointing the lifestyle for which you need to plan.

The answers to questions like these will help you define and set reasonable financial goals.

Where money comes in

The lifestyle plan includes allotting assets and income toward the goals you strive to achieve. Money can come from earned income from work, or earnings on your investments. As in all financial planning, you must guard against inflation, taxes, and risk of loss of income due to death, disability, or legal action. You must also consider how to invest savings to help maximize growth while minimizing risk of investment loss over the investment time horizon to your goal.

You can begin to implement your plan when you start to earn money and save for your goals. Your goals can be short-term, intermediate-term, or long-term. You should select investments according to the risk and return you need in order to achieve your goals. Generally, short-term goals require the safest investments while long-term goals can be invested more aggressively.

Measure your progress as you go along

But you're not done yet. You should have mileposts along the way to see how well you are progressing. When you made your plan, you decided how much money you would need at a specific point in time in order to achieve your financial goal. A milepost measures how far along the route you are to achieving your financial goals.

In some instances, you will be ahead of schedule while in others you may be behind schedule. Or your goals may change. Be prepared to stop and reevaluate your plans and change direction if necessary. It's your life, so live it the way that best meets your desires, dreams, strengths, needs, and goals.

What to do when you are out on your own

The financial future of most people is dictated by the way they start out as independent adults.

If you are going to set up house on your own or with a partner (or know someone who is), then you may find some good advice here.

Get in financial shape early on

Establish good financial habits early. They can save you lots of grief and money down the road.

Additionally, according to the National Council on Family Relationships, financial disagreements were the strongest disagreement types to predict divorce. Good financial habits will go a long way toward providing peace and harmony in your home. The key to developing good financial habits is a sound lifestyle financial plan that will help you achieve your lifestyle goals. Over time, your goals will change—that's okay.

A good financial plan will allow you to change your goals as you go along. But remember, they're your goals. Many persons become discontented because they try to achieve someone else's goals. You've heard the expression "keeping up with the Joneses." This refers to trying to achieve someone else's goals. Even if you succeed, you most likely won't be happy. You will only be happy if you achieve your own goals.

Be realistic about your goals

You may not be able to achieve all your goals in the first week out on your own. Not even in the first year, five, or even longer. The trick is to be realistic about your goals by setting a time frame in which to achieve them. In order to achieve your goals, you need time to accumulate the required resources.

Be realistic about your lifestyle planning goals. (Graphic: Hannah Smart/Cashay)
Be realistic about your lifestyle planning goals. (Graphic: Hannah Smart/Cashay)

You will find that you can classify your goals as short-term (one year or less), intermediate-term (two to five years out), and long-term (more than five years out). You can also group your goals by order of importance. Some are "must have," while others would be "nice to have." No one can tell you which goals are more important than other goals—let others keep up with their own Joneses.

Make a list of your short-, intermediate-, and long-range "must haves" and "nice to haves." It's important to write this down. Goals that are not written down are nothing more than wishes. Goals are achieved; wishes may or may not come true.

Live within your means

It will be easier to achieve your intermediate- and long-term "must haves" if you can economize and save on your short-term "must haves" and "nice to haves." You do this by making some short-term financial decisions regarding your current lifestyle.

All too often young adults fall into the credit trap they waste years getting out of. This happens when they mistake short-term "nice to haves" for "must haves." Rule of thumb: if you don't have the money to pay cash now, it's not a "short-term must have." Avoid living beyond your means. You will need to save and invest in order to achieve your future goals.

To achieve your goals, you will need sufficient financial resources. These come in the form of income, savings, and investments. Whatever income you do not spend on short-term goals can be saved for future goals. If invested properly, your savings can generate more income and resources to achieve your future goals and more.

Why housing is important

An important part of living within your means is choosing the right place to live. Housing will be your largest expense, consuming about 25–40% of your income.

Whether you buy or rent depends upon your lifestyle goals and the current local housing economy. While it is generally considered better to buy a home than to rent, in some localities you may find it cheaper to pay rent than to pay large mortgage payments, taxes, and other homeowner expenses.

Cash flow and savings need to be an overriding consideration.

Should you decide to buy a house rather than rent, there are some income tax benefits of which to be aware. Interest paid on your mortgage as well as points paid to acquire the mortgage may be deducted from your income. Any property taxes you pay may also be deductible up to a limit of $10,000 that also includes state and local income or sales taxes (as of 2018).

Costs for making any improvement to the house such as putting on a new roof, replacing plumbing or electric wiring, or adding wallpaper (not painting) can be added to your cost of the house to reduce potential capital gains taxes when you sell the house. You should keep careful records of these kinds of expenses.

Your home as an investment

While some very creative financing arrangements appear to make home ownership very affordable, they might have unforeseen consequences on the other end that can be devastating. On average, a family owns about three homes over its lifespan.

This is possible because equity from one home is used to upgrade to another. A home is only a good investment if the mortgage terms and economy allow equity to build up as the mortgage balance declines. It's not true that housing prices always go up any more than it's true that stocks always go up.

There are many ways to keep housing costs down. One example is to share housing expenses with others, or opt for smaller and more economical housing. Choose your neighborhood wisely, keeping in mind how much it is going to cost to commute to work, transportation costs, and safety. Housing is a short-term "must have," but it shouldn't be allowed to break you financially.

Choosing your housing wisely will go a long way toward helping you realize your other lifestyle goals. After making a written list of your goals, attach estimated current costs to achieve them. Use these figures to start your financial plan. Make a short-term budget that allows you to save and invest for your intermediate- and long-term goals.

How to lifestyle plan when you start having children

These days, having children is more of a choice than it was a few generations ago. That being so, there's no reason not to prepare a financial plan for a family lifestyle.

The basics are the same as any financial plan: set short, intermediate, and long-range goals, and then work out the numbers. When planning to raise children, you need to know that children are expensive—very expensive. If you are having your own children—the old-fashioned way—there are increased medical costs for prenatal care. Then there's medical care for newborns, which is followed up by regular pediatric visits.

If you're adopting, you can skip the prenatal and possibly the neonatal care (though you may need to budget for adoption expenses). Either way, raising children means increased medical care costs or increased health insurance premiums to cover your children.

Then consider costs of clothing and diapers. Young children outgrow clothing very rapidly—especially shoes, which aren't cheap. If you are like most parents, you won't want to wash diapers either—so be prepared to spend a lot on disposable diapers.

Don't forget housing. A child or two means an extra bedroom—now. Do you need to move to larger quarters before starting a family? If you plan to move later, you still need to factor those costs into your plans.

Another thing to consider: it is very likely that one parent is going to have to stop work for a while, which means decreased family income. If you are financially able to hire a nurse or nanny, you may not have to sacrifice job income, but you will have the additional expense of a caregiver.

List your costs and factor the spacing of children

When planning financially to start a family, make a list of all the increased costs and changes in income that will result from having children and the duration that this will last.

Consider too whether you want to raise more than one child and the spacing in ages of multiple children. It may be more economical to have several children close in age to allow the "stay at home" parent to re-enter the work force earlier rather than later.

Having children close in age can also help economize on clothing costs if a younger child uses clothes that an older child has outgrown but not worn out. Children close in age may also be a benefit later when the school-aged children apply for financial aid, since aid is partially awarded on the basis of cost of all children in school during the same academic year.

This applies to private elementary and secondary schools as well as to institutions of higher education.

You also need to prepare for future childcare costs including toys, sports equipment, education supplies, outings, and higher education. Oh, and probably dental braces. You may as well start saving for these now while the kids are still young so you have time to accumulate sufficient resources.

If you are saving for your child's higher education, the IRS offers tax breaks to persons using the Coverdell education savings account or your individual state's sponsored 529 qualified tuition program.

A daycare employee watches children in carts at a park in downtown Washington, DC. (Photo: MLADEN ANTONOV/AFP via Getty Images)
A daycare employee watches children in carts at a park in downtown Washington, DC. (Photo: MLADEN ANTONOV/AFP via Getty Images)

Children can save you money at tax time

You should consider consulting with a tax advisor, however. Some good news is that children are a tax break.

But you will still spend a lot more on the kids than you save on taxes. Up through 2017, each child gave you a dependent exemption. However, the new 2018 tax law removed the dependent exemptions while greatly increasing the standard deductions—nearly doubling them to the following for 2020:

  • Single filers: $12,400

  • Head of household filers: $18,650

  • Married couples filing jointly: $24,800

Direct medical expenses and medical insurance premiums are itemized deductions subject to IRS limitations. You may also qualify for certain tax credits that are a dollar-for-dollar reduction in taxes. These include the child tax credit ($2,000 per child), a new $500 credit for dependents other than children, the dependent care tax credit (up to $1,050 for one child and $2,100 for two or more children), and the earned income tax credit (amount depends on income and number of dependents).

In order to get the credits, you must complete the appropriate federal income tax return and calculate the amount using the IRS's complex methods. However, with a good tax software program or professional help, this should not be an insurmountable problem. If you want to complete your own tax returns, you can obtain IRS Publication 17, which has all the details.

If you pay childcare costs to someone who provides the services in your own home, such as a nurse, nanny, or au pair, you may be subject to paying household employer taxes including withholding, Social Security, and unemployment taxes (see IRS Publication 926).

And as with all tax planning, you may want to check with your tax advisor when evaluating the applicability of these tax options.

Raising a family is an awesome responsibility and should be given careful consideration and financial planning. Children will put a great strain on any relationship because of the emotional and financial demands they make. However, if you are properly prepared emotionally and financially, children can be the greatest joy in your life.

Summary of lifestyle planning

As you progress through life, your goals may change, too. While it is impossible to accurately foresee all the things that will change in your life, you certainly can plan for those changes you expect to make.

Start by setting down those things that will truly make you happy. Then see what it takes to achieve happiness. Set your goals in writing and review them along the way. It's okay to modify or change them. However, once you commit them to writing, you will be on your way to success.

Practical ideas you can start with today

  • Make a budget that balances your cash inflows and expenses.

  • List your financial goals, the date you want to accomplish each goal, and the dollar amount of each goal.

  • Determine how much money you can comfortably set aside to invest.

  • Discuss long-term financial goals with your future spouse: e.g., having children, buying a house, and funding retirement.

  • Investigate the tax breaks available to parents.

  • Determine whether buying or renting is more advantageous.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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