1.) Get Organized: Pull out that old shoe box where you keep all those important documents about your financial life and finally get organized. Don’t just make a neater pile; actually create a categorized filing system. Categories you may want to include: company benefits info, health and dental insurance, life and disability insurance policies, home and auto insurance coverage, retirement account statements, your kid’s college fund statements, Wills, Power of Attorney, Trusts, tax returns, and all loan documents.
2.) Reflection & Direction: Now that you have the “Good, Bad, and the Ugly” of your financial life all organized in front of you, reflect on all the dumb money decisions you have made in your lifetime. All the ones where you wish you had a “do-over”. Now focus on the lessons you learned from those mistakes, and write them down. Next, really think about what you want for your financial life. What does financial security and independence truly look like for you? What scares the hell out of you? What do you really want in your golden years? How does debt and overspending make you feel? Where would you like to send your kids to college?
3.) Live Within Your Means: This is not rocket science. We all know we should live within our means, but yet this is where we all struggle the most. Our culture has ingrained in us that if we want it now, then we should have it now. This has driven many of us to overspend and rack up huge amounts of debt. The savings rate by Americans is lower than ever before. It’s time we put our “big boy panties” on and start acting like responsible adults! To create your budget you can use some fancy software program, an Excel spreadsheet like what’s available on my website, or just use a note pad. It really doesn't matter. Use whatever method is easier for you. You are no longer allowed to sit back scratching your head wondering where all your money is going. The hard part is not creating the budget, but actually having the discipline to stick it. First, just list all your income sources for the upcoming month. Then list all of your expenses for the upcoming month. Don’t try to convince me you have no idea what your expenses are! It’s 2012. We all have access to online banking which will show you in great detail where you have been spending your money. If you have more expenses than income, something has to go OR you must produce more income. See, it’s not rocket science. Start analyzing where you are wasting the most money. For many people this will be food. We all go out to eat way too much. So STOP it!!!. Cut what expenses that can be cut out of your budget then stick to it! A great FREE resource for budgeting is www.Mint.com.
4.) Create a Balance Sheet: This is nothing more than a fancy name for a list of all the things you own (assets) minus all the people you owe (liabilities or debts). This is the starting point of the scorecard on your financial life. Beside each of your debts, list the interest rate and minimum monthly payment for each. Make it your number one goal to get to a positive Net-Worth (assets-debts) if you aren't there already.
5.) Prepare For The Worst: Most people try to skip some or all of the areas of this one. But if your financial plan is going to come to fruition in the face of adversity you must have proper risk management. I recommend you seek professional help in many of these areas. There is no way I can be detailed enough in this article. Don’t confuse the following list to mean that I am simply suggesting you go buy stripped down basic insurance products. You need to own the proper coverage limits based on your unique situation with a quality company. And that’s why you should seek the help of a professional. Here is a list of all the Risk Management areas: Cash Reserve Fund, Health Insurance Coverage, Home & Auto Insurance Coverage, Personal Liability Coverage, Life & Disability Coverage, Long Term Care Funding, and ID Theft Protection.
6.) No Consumer Debt: To become financial independent you must get out of and stay out of consumer debt. That means no credit cards, credit lines, or other high interest debt. I consider high interest debt anything with an interest rate over 6% in today’s low yield environment. Your first order of business after you have covered all the needed risk management areas is to pay off all consumer debt ASAP before you start saving. It makes absolutely no sense to contribute to your IRA where you will be lucky to get an 8% return over the next decade and pay 18% interest on a credit card.
7.) Plan for Major Purchases, Retirement, and Sending the Munchkins to College: Do you have to replace a vehicle in the near future? Do you have to pay for braces for little Suzie? If so, you will want to save for these types of things first. Why? Because it’s highly unlikely you can go without a vehicle. And little Suzie can’t go without straight teeth, unless of course you live in the Deep South. So if you don’t plan to pay for those sorts of things separately the money will either come out of your retirement fund, cash reserve fund, or you will be forced to go back into debt. As for retirement and college savings, there is no magic savings percentage I can give you. Obviously the more you can save the better. We all have different ideas of what retirement will look like. So I highly recommend working with a Certified Financial Planner to develop the proper plan. But let’s not get too wrapped up in the numbers. You can only control what you can control. If you aren’t able to save 15-20% of your income (or whatever!) it doesn’t matter what I tell you should be saving. So control what you can, and save the maximum you are able towards retirement and college.
8.) Recognize What a Professional Investment Strategy Is (and Isn't): This one is a blog post (or more) all by itself. A couple things here: Most financial advisors are sales people. So beware of taking investment advice from someone who is paid by what they sell or based on the size of your account. Work with a Fee-Only Advisor, someone who is paid only to provide advice. And don’t try to do this on your own. A sound investment strategy should be based on your unique situation with a focus on diversification, low costs, and common sense. Contact me for free review of your investment strategy.
9.) Avoid the Tax Man: No one wants to pay more in taxes than they have to. The more complex your situation, the more you should seek out an extremely knowledgeable tax person. Don’t try to be cheap here. Proper tax planning will save you way more than it costs you. And avoid places like “H&R Hack”. Far too often I see tax returns with all kinds of mistakes coming from these guys. If your situation is fairly simple, like you earn a modest W2 income for example, programs like Turbo Tax are perfectly capable of helping you. But hire an expert if you own rental property, a business, or you are a high income earner.
10.) Get a Will: Just as no one wants to talk about insurance, people really don’t want to talk about incapacitation, death, and who will get your stuff. But you must protect your assets and your heirs by having a proper Estate Plan. At the very least you need a Will, Healthcare Directive, and a Power of Attorney. And don’t try to use some website like wwww.USCrappyLegalForms.com. You need expert advice from a qualified Estate Planning Attorney.
I have painted some very broad stokes in this article. There is no way I could cover it all, and do each area justice in blog post. My goal is for you to realize that true Financial Planning involves many moving parts. You need help of a Certified Financial Planner along with many other professionals. Contact me for a free initial consultation at www.JasonQuallsCFP.com.