We believe money is one of the last taboos in the wellness world: Why is it that we can talk about our sex lives and not our salaries? With an underlying drive to empower, we’re aiming to address all your burning questions about making money (and making more), saving it, spending it, but most of all how to use it to power the life of your dreams.
Financial planning is a process that aims to protect you and your family from all those things that can go horribly wrong in life so that you can enjoy all the things that can go marvelously right. According to the official Certified Financial Planning protocol, once a client and adviser have defined the scope of their engagement, the next step is "Determining a client’s personal and financial goals, needs, and priorities." If you want to do your own financial planning, make yourself the client! Start with an honest assessment of where you are and where you would like to go.
Here are seven steps you can take to build a simple DIY financial plan to set up the conditions for living your best life.
Step 1: Figure out your "HERE"—where your financial starting line is.
This is mostly a quantitative exercise, although if the quantities in your savings and checking account aren’t enough to sustain you, then the quality of your life is no doubt affected. Divide one piece of paper into two columns and write down everything you OWN [your house, your savings account, your 401(k)] on the left and everything you OWE (your mortgage balance, your total student loan debts, etc.) on the right. Subtract what you owe from what you own to arrive at your total net worth. Then flip the page over, and make another two columns. Put your monthly INCOME on the left, and all your monthly EXPENSES on the right. Subtract your expenses from your income to arrive at the money you can use to save, invest, pay off debt, and build a better financial future.
Step 2: Determine your THERE—where your personal finish line is.
This is not a number. It is your vision of the life you hope to have someday, and captures what you believe is truly worth pursuing in your life. This is where you dream. Describe this vision of your future as vividly as possible, but keep it grounded in reality. Think two-bedroom house, not four-story mansion. As an adviser who has worked with hundreds of families, I’ve seen great things happen when folks plan their financial lives with their end zone in mind.
Step 3: Set specific goals that can get you from HERE to THERE.
Some examples might be:
- Save $x for the down payment on a house in five years.
- Pay off $y of your debt in two years.
- Attend graduate school so that you can advance in your career and get a better-paying job.
Each of these goals will require you to achieve a number of micro goals, such as apply for graduate school, save enough money to pay some of your tuition, negotiate with your boss to fit school into your work schedule, etc. Think of these goals as your steppingstones to the future you envision.
Step 4: Start saving.
No matter how tight your finances, set a weekly or monthly savings target and stick to it, until you’ve managed to build an emergency fund equal to three months of your living expenses. Once you’ve hit that bull's-eye, begin saving for the specific goals you established in Step 3.
Step 5: Knock out your high interest-rate debt.
This is usually the credit card balance that never seems to get smaller, or the student loan balance that refuses to budge. If you read my article about getting out of debt last week, you’ve already started removing the obstacles on your path created by your past financial emergencies or misbehaviors. With debt behind you, you’ll be in a much better position to build the future you want.
Step 6: Begin investing.
Yes, you can invest. If you have a retirement plan at work, save the maximum amount allowable every month. Most 401(k)s and 403(b)s have some kind of a match for employee contributions, which gives you more bang for your bucks. If you can’t pay your rent and buy groceries while saving $1,500 a month for retirement—and a lot of folks can’t—at least contribute enough to qualify for any matching your company offers. Your company doesn’t yet have a 401(k)? Open an IRA account and contribute the maximum you are allowed, which is $5,000 for most folks, but check with your accountant to be sure.
Step 7: Decide on your legacy.
This is an idea my father planted in my brain when I was a young man that I have never stopped thinking about. As my dad saw it, the ultimate legacy would be a family bank—a source of funds for housing and education that might be available for many generations. I may never have enough money to establish a family bank, but that idea still gives every long-term financial decision I make a sense of purpose and pulls me through the dark and difficult times that we all inevitably face. I might actually buy less house, or less car, or take less vacation, or make other trade-offs to make these big ideas happen for my family and my legacy. What legacy do you want to leave? Having a sense of purpose can be helpful for your well-being but especially for your finances. It helps bring priorities into perspective.
Let your life's vision act as your personal finance decision anchor. It can remind you what you are supposed to be doing whenever you’re tempted to spend money on something that isn’t in your plan, or when every fiber of your being is stressed about the state of the world, and you want to take all your money and run. When fear or greed grips you, or the desire for a new toy, private school, or fancy new electric car overwhelms your wiser self, your vision can remind you of what is important and bring you back to the trade-offs you SAID you wanted to make to get the outcomes you know are important to you.
The road from HERE to THERE is easier when you’ve planned your route.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations to any individual. All investing involves risk, including possible loss of principal. For your individual planning and investing needs, please see your investment professional.