Four Questions to Help You Plan Financially

AARP recommends a set of four basic questions that can be used for any type of financial goal--from retirement budgeting to buying a car.

The AARP Web site provides extensive resources for seniors. One helpful article, entitled "Your Money Plan," is about the importance of financial planning. While many people flinch at the term "financial planning," this article breaks down what could be a complex undertaking into four simple questions. AARP suggests asking this set of questions before making a financial decision and then asking the questions again from time to time to check on the continued validity of your answers.

The Four Questions

1. Where do you want to be? This first question really requires two answers. First, you need to set a goal, such as retirement at a certain age or taking an exotic vacation. Second, you need to estimate how much money you will need to reach that goal.
2. How much time do you have to get there? This question may seem straightforward. However, it may be possible that after you review your finances, you will have to either adjust your goal or give yourself more time to reach it.
3. Where are you now? It is impossible to plan for the future without a starting point. This third question requires you to pinpoint exactly where you stand with your finances and whether you are on track given the amount of time you allotted.
4. What vehicles give you a chance to get there on time? The fourth question requires some extra research on what financial products and investments are available to help you reach your goal. Often, you will need to consider what financial vehicles match with your requirements for the money--be it a certain interest rate, a level of safety, or a fee structure that is reasonable. For example, depending on your goals, a money market account, a mutual fund, or a reverse mortgage could be the financial tool you need to reach your goal.

Finding the Right Vehicle

Not sure how to start researching? If you own a home and are wondering how to tap its equity for current spending needs, you might begin by comparing quotes from lenders and reviewing information about reverse mortgages. Financial planners sometimes recommend a reverse mortgage for retirees who have plenty of equity in their home but little cash for day-to-day expenses.

Whatever the right financial vehicle, make sure you fully understand the terms and why you are choosing it over another method to reach your goals. By following these four steps, you can rest assured that you have approached your financial decision systematically.