If the recent ups and downs of the stock market have you tossing and turning at night, it's not because you need to get out of the market — it's because you need to get a real financial plan.
You can pinch pennies or throw money into a retirement account or make any other financial moves you want, but unless those moves are part of a holistic financial plan, you are always going to be worried and anxious. Without a plan, you don't know if you're on track, you don't know what your goals are and you don't know when you'll get there.
Setting financial goals that look at your entire life, making a plan to achieve them, and creating options to handle the bumps in the road means you can completely ignore the dips and dives of the Dow — along with the hysteria of financial pundits — and get a good night's sleep.
A good financial plan does not have to be complicated. It is important to understand that no plan is perfect and there will be ups and downs along the way, but having a plan means you have a starting point from where you can adjust and recover when things don't go your way.
Start with your risks. Having great investments doesn't mean much if you have to drain it all in an emergency, such as losing a job or suffering a serious injury. Start with building an adequate emergency fund and buying disability, life, and renter's or homeowner's insurance.
Experts recommend your emergency fund be equal to at least three months' worth of living expenses, but six to eight months is best. That will take a while, so start with a goal of $2,000. Set up a separate account and start with two percent of your paycheck. You will barely notice the difference, and you can increase that in small increments over time.
For disability insurance, see if that is offered through your workplace. Otherwise, get your own and remember, most workers run a greater risk of becoming disabled for a length of time than of dying, so don't make life insurance your first priority.
For your financial goals, you can also start small, by putting 2 percent into any workplace retirement savings plan, such as a 401(k) account. Try to raise your savings to the maximum amount that is matched by your employer, which will give you an automatic gain of up to 50 percent on your money.
If your employer does not offer a match, put 2 percent of your take-home pay into a Roth IRA, where the money grows tax-free. Another benefit is that you can withdraw contributions to a Roth account without penalty if you hit a financial emergency.
As for where to put your money, savers younger than 40 should stick purely to a diversified portfolio of low-cost mutual funds or exchange-traded funds, called ETFs, for short. Set a goal to save at least 10 percent of what you make into your retirement funds if you are young. If you're starting after 49, you'll have to up that goal to 20 percent.
You can start investing in a broad market index fund, such as one that matches the S&P 500, then diversify from there. As you hit different phases in your life, such as getting married, buying a house, having children, or hitting a milestone birthday, it pays to meet with a financial planner or investment advisor to create a more specific strategy.
In the meantime, you can handle the basics yourself. If you cover these first steps, you will be well on your way to a good financial future — no matter what the stock market does tomorrow.
This article was provided by our partners at MoneyTips.