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.
1)
Organization
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 jasonwqualls@gmail.com 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.
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