There are 5 initial steps you must take before embarking on your financial planning process. These steps are so simple; you will be tempted to skip them. But DON’T! They are crucial to developing a true financial plan.
One of the main reasons why people find financial planning so overwhelming is because they are not organized. You have all this “stuff” but it’s everywhere, making things complicated, and sometimes frustrating. If you organize your documents it will reduce a lot of the confusion, and make things easier to follow. So before you get started, find all your bank statements, investment statements, insurance policies, legal documents, and anything else that you think might be important. Have a folder for each type of document. This will take some time, but it will save a lot of headaches later on.
2) Spending Patterns
Too often I see people with decent income and low expenses living pay check to pay check. The majority of them do not know where their money goes. I recommend keeping track of your spending habits for at least a two week period. I know, I know this is boring and tedious, but this will benefit you in couple of ways: First you will realize how much money you waste! And second it will help you later on in the budgeting stage. Often I have worked with individuals and families complaining about not knowing where all their money goes. Every time I have asked anyone to do the exercise they come back so astonished with how much they were wasting on stupid things. If you know where your money is going, you will be able to see where you need to reduce spending to reach certain financial goals.
3.) Understand Your Financial Personality
This takes some self-awareness and honesty. To build wealth you have to come to terms with who you really are, and accept it! Everyone does not fit nicely into a box like some financial guru’s will have you to believe. We all look at money differently based on our financial personality.
The 7 General Personality Types:
Entrepreneur: risk takers, mission about their business, all they focus on, they concentrate all investments in their expertise, biggest risks are liquidity and no diversification, this strategy doesn’t work in tough times.
Nester: favorite investment is their home, they don’t buy new carpet, they invest in it, will buy a new roof vs. vacation, impulse to pay of home ASAP, and believe that will make them feel more safe, love to buy time shares and vacation homes, biggest risks are no ROI on remodels, don’t understand benefits of positive leverage of real estate.
Workaholic: buy anything that saves them time, desire status and prestige, very ad hoc with money, act on stock tips from a party, open a CD because bank offers free gift card, likely to succumb to salespeople and buy high risk investments, they insist things like boats and cars are good investments, usually can thrive with coaching, need hand holding before major purchases.
Vacationer: spend money on experiences rather than things, not a lot of value placed on money, just one seminar away from happiness, value education, likely to be professional students, these folks usually become nesters.
Gambler: want to get rich quick and spend it quick, addictive personalities, get depressed and repeat the process, huge risk takers, biggest risk is no self-awareness.
Scaredy Cat: hoard their money in constant fear, scared of running out of money, avoid any long term investments, need a strong dose of education.
Shopaholic: fear but big spenders and givers, very outgoing, in denial about spending, unlikely to hire a financial planner because they don’t want someone to know the truth.
Each has pro’s and con’s. Each personality may be situational and will change as we go thru life. Some types can make a disastrous marriage. Before you can become financially fit you need to understand who you are and your natural tendencies towards money.
4.) Current Financial Position
Next, I want you to take a snapshot of your current financial position. Write down all your debts and all of your assets. This will become your balance sheet and will determine your net worth. A balance sheet is a two column page, on the left side you have all the things you own and on the right side you have all the people you owe. Once you have all your assets and liabilities organized, you simply subtract assets from liabilities and that is your net worth (Asset-Liabilities=Net Worth). You should take a look at your balance sheet at least every quarter, and I recommend updating it on a monthly basis. You also want to have a clear picture of your income and expenses. This will become your cash flow statement. The cash flow statement is an overview of your “cash in-flow” and “cash-outflow”. Your inflow is ALL of your income and your outflow is all your expenses and savings. The cash flow statement will help you determine if your income is sufficient to cover your expenses. Together the balance sheet and cash flow Statement will give you a good picture of your current situation and help you set realistic financial goals. Send me an email at firstname.lastname@example.org and I would be happy to give a FREE financial statement worksheet in Excel.
5.) Create a Realistic Budget
Budgeting is a very basic and important part of personal finance. It is a MUST for financial planning. There is no need for a complicated budgeting process. There are many great software packages out there you can use to create your budget. The two most popular ones are Quicken and Microsoft Money. You can also use a simple spreadsheet for budgeting. Google Documents also has a straight forward budgeting spreadsheet. Your budget won’t be perfect in the beginning, but you gotta start somewhere. You can always make needed adjustments in the future. Note! Not all budgets are the same. Do what works for you. I’m a spender by nature, so budgeting used to be very difficult for me. I would make the perfect budget on paper, but never follow it. Why? It’s hard for me to envision everything I may want to do in a month. Will I want to go to dinner once? Three times? Will I buy a want a bag of chips and Yoo-Hoo at the store this month? So, I have a budget based on years of spending history in Quickbooks, but I also don’t worry if I follow it to a T. What I do is pay myself first. Every dollar and make I automatically save 15% no matter what. The rest is available to pay bills, go to dinner etc. I pay me, then my bills, and then I can basically blow whatever is left if I want. Sometimes I do, sometimes I don’t. But I no longer feel bad about myself when I overspend by $20 at the grocery store. This strategy works for me, but it may not work for you. Do what’s best for you and your family. The point here is for you to be in control of your money, not have a plan and wonder where it all goes.
One more important note! The above are all things you must do to if you want to achieve financial success. But remember, most of us can’t do it alone. We need someone to guide us and hold us accountable. That’s where I come in. I am a Financial Life Coach. I help clients every day do exactly what’s outlined above and more. Go to www.jasonWqualls.com for more.