Amongst the day to day planning of a budget, people often forget to plan long term. Many believe that the future will work itself out or can be worried about later. Make no mistake; the future is coming, and unless you prepare for it now, it will be a pain to deal with later.
I realize that “long term” is vague , but planning is necessary for each of its definitions:
(1) Within the next year: I consider this short term, but I know a lot of people who never plan this far ahead. These people are shocked when their kids need new clothes. They cannot believe Hannukah came so soon, as if the date changes every year (okay, maybe it does, but only 11 days.) As Dave Ramsey puts it, “your kids growing should never come as a shock. [Hannukah] is never a shock.” Think of the costs you will pay on average for new clothes for the kids, the major birthday season of your family, and your summer vacation. Project these costs and divide the number by 12. This is how much money you should strive to set aside every month. Keep it in a small envelop or separate account, while you have an excel file explaining what every shekel is aimed for. This way, when these expenses come up, you’ll be prepared.
According to Israeli law, workers receive dmei havraha. This is money that comes every June or so in order to kickstart your income and get you spending during the summer season. Some people think they should not save for their summers at all and just hope the dmei havraha will cover it. Theses people go onto to spend 5 times the amount of dmei havrah on their summer vacation and wonder where their money went. There is nothing wrong with factoring your dmei havraha into your income so you know how much to save, but do the actual calculation. Five minutes of math can save you from the shock of an empty bank account.
(2) Within the next 5-15 years: What are your goals? Do you want to save for a down payment on a house? Do you expect any of your children to get married or go to college? Well, then the amount you plan to save should be taken into account and pro-rated as well. You may also want to take into account your keren hishtalmut when planning for this. My advice would be to just assume you are getting back what you pay and your company matches from the keren. Consider any interest a bonus.
(3) Retirement: You will want to retire someday, and unless you plan for it, it isn’t going to be what you imagine. According to Israel law, at least 5% of worker’s pay is set aside for retirement, rising to 15% by 2013 (see the previous post about pensions). The good news is that if this is true, then Israelis will have most of their retirements taken care of for them. Obviously lifestyle will affect this greatly, as will the choice of when to retire. It is becoming a given to my generation that we will never retire; perhaps we’ll just work fewer days as we get older. Anyways, Israel’s system of mandatory pensions will hopefully be social security done intelligently. As always, you should consult a financial expert to see what is right for you.
A word of warning and advice. Many financial consultants are really just salesmen for funds. Not that selling funds isn’t an important part of consulting, but there are some who are a bit too much salesman and not enough consultant. Never be afraid of getting a few opinions and educate yourself in order to make sure you choose the right consultant. Don’t be afraid of hurting anyone’s feeling, after all this is your retirement.