Welcome to our financial planning guide at FinancialPlanners.com! It is our goal to take the guesswork out of what it is to plan your finances and what it is to have a professional “financial planner” do it for you. To begin, it is prudent to understand what financial planning is all about so you can be sure you're getting a financial planner who has your best interest in mind.
We believe that effective personal financial planning starts with a thorough understanding of the following key concepts:
Controlling your finances with a budget
Establishing long-term financial goals
You need to control your day-to-day finances if you ever want to be able to do the things that bring you satisfaction and enjoyment in life. You can accomplish this with a budget!
Next, you need to know where you want to go with your money. This means choosing and following a course toward long-term financial goals, such as buying a house, sending your kids to college, or retiring comfortably.
These first two steps are necessary and crucial to creating a solid financial foundation on which to build. Let’s get started.
Financial planning begins with budgeting. The budget is a framework in which you manage your money. Without a budget, can you even really say you have a financial plan? Probably not.
Let us define a budget then: a budget is a tool for tracking where your money goes. It does this by defining limits to expenditures as fixed dollar amounts so that you reach your goals – be they daily, weekly, monthly or yearly. A budget can be as simple as saying we will not spend more than $400 on food this month, or as complex as specifying the types of foods you will limit your spending on, such as junk food, fast food, eating out, eating in, etc.
For many people, the word "budget" has negative connotations and conjures scary images of charts, numbers and graphs. But instead of thinking of a budget as a chore, think of it as a tool in your arsenal to achieve financial success and peace of mind.
Whether you make a billion dollars a year like Bill Gates or have to hustle for tips at a local restaurant, a budget is the first and most important step you can take towards putting your money to work for you instead of being controlled by it – and forever falling short in the game of financial success.
To those of you who think you know where your money goes without keeping detailed records, you might be really surprised if you actually tracked your spending. We can almost guarantee you that much of your hard-earned money is going down the proverbial drain.
Don’t believe us? just keep track of every nickel you spend for about a month – all the soda pops, parking meters, coffee and cigarettes. We can almost guarantee you'll be surprised and perhaps shocked by how much all these seemingly small expenditures add up. Alot. One soda pop a day from a vending machine at $1.50 will set you back nearly $600 a year. And you thought gasoline was expensive. What an expensive habit it is if you drink a Coke or two a day.
Tracking your expenses gives you a sturdy sense of where your money goes and can help you reach your financial goals: saving for a down payment on a house, starting a college fund for your kids, buying a brand new sports car, planning for a comfy retirement, getting rid of those pesky credit cards, or simply saving for that long sought-after trip to Vegas. Budgeting can help get you all these tings. But here's the kicker: there's more to budgeting than meeting your financial goals. Did you know budgeting could save your marriage?
How often have you argued with your spouse or loved one about money? Have either one of you ever made a big purchase without the permission of the other? Ever gone to an ATM only to discover the account balance isn’t what it was yesterday? If your answer is no, you're probably a fictional character in a fairy tale. Unfortunately, fighting over money is all too common in most households.
In fact, the sad and sober reality is that financial matters are one of the leading reasons couples split up or get divorced. It should come as no surprise then that getting a handle on your spending, implementing a budget, and saving for the future can have tremendously positive effects on your relationship with your spouse or partner. To do so requires making the time and effort to understand your budget and your financial goals. And when it comes to your significant other, it's crucial for the two of you to be on the same page.
So it should be clear that although you are prepared for the enviable task of financial planner and finding a financial planner, you need to understand have a budget. It should be fairly clear that achieving your financial goals will be insurmountable without one.
As with anything else in life, unless you define your financial goals, with specific plans for meeting them, it's highly likely you'll end up wandering aimlessly from one purchase or financial crisis to another, leaving your financial future to to vaguaries of random chance. You don’t want to do that. You want to achieve some comfort in life – if not for yourself, then for the people you care about and for those who depend on you. Financial planning is important. But it seems complicated and daunting, doesn’t it?
There are no hard and fast rules for implementing a financial plan. The important thing is to do SOMETHING, and to start NOW.
One surefire way to get started is to do what you are in a sense doing right now: educating yourself!
Read Money magazine and other periodicals. Go to a book store and dive into the finance section. Take some books from the racks back to the coffee shop and learn all you can. Surf the Internet – there's a wealth of sensible advice out there, and it's free. Learn as much about financial investments as possible. The stock market isn't the sole domain of the ultra rich and wealthy. You too can learn the ropes of investing. In fact, with a little effort you can learn enough to make educated decisions that can possibly increase your net worth many times over. To do so you need to identify the right steps you need to take to achieve these goals. You need an action plan. And you need to put it to work.
One goal-setting technique we love to use is the Smart System. That's 'smart' as in “Specific, Measurable, Attainable, Realistic, and Timed.” What exactly do we mean by this? Let’s take a closer look (using a financial context):
Specific – i.e. are your financial goals clear cut? You don’t want to say something like "I want to have more money next year." Determine exactly how much money you'd like to have next year.
Measurable – i.e. can you quantify your goal? Well, since you've set a dollar amount, you've done just that. Say you want to save 5,000 dollars by the end of next year. That, my friend, is a measurable goal.
Attainable – i.e. do you make enough money to reach your newly-measurable goal? If your goal is to save 40,000 dollars by the end of the year and you only make $30,000 a year, you're setting yourself up for frustration. Set obtainable goals. Which leads us to our next point ...
Realistic – i.e. do you really think your goal is reasonable? Be honest. For instance, if your goal is akin to hitting the lottery, sorry, but you've flunked in the realism department big time. Make it realistic. Make it something you can do.
Timed – i.e have you given yourself a time limit? Without one you might very well end up in an indefinite, unmotivated haze with no end point in sight. People perform long-term tasks best when the finish line is close enough to be seen. It's how we're wired. By setting a time limit you make it possible to be able to say to yourself, "Hey! It's the end of the year and I've met my goal!” Important caveat: make sure you review your progress as time passes. Look at your budget after each quarter to see how you're doing.
Remember that budgets are a necessary evil in financial planning. They're the only practical way to get a grip on your spending and make sure your money is being used the way you want it to be used and is helping you reach your ultimate financial goals.
Creating a budget generally requires three simple steps:
1. Identifying how and where you spend all that hard-earned money you make.
2. Setting goals that take into account your long-term financial objectives.
3. Keeping track of all your spending so you stay within your guidelines.
If you use a personal-finance program such as Quicken or Microsoft Money, their built-in tools can greatly simplify the budgeting set-up process. In addition to all the standard check-reconciling and reporting features, it's easy to set up a system of warnings to alert you when you're in danger of exceeding your budget limits.
One drawback of tracking your spending with a computer program is that it can encourage a degree of anal attentiveness that can drive you nuts after awhile. The trick is to concentrate on those monetary categories that mean the most to your financial goals. Leave the less-important aspects of your spending aside if you find yourself obsessing over them. Remember the big picture.
Some practical advice: you'll see that most budgeting software includes a “miscellaneous” category. This should literally be less than 5% of your spending. If 80% of your spending is “miscellaneous” then you are not categorizing your expenditures properly.
When projecting the amount of money you can live on, don't include dollars you can't be sure you'll receive, such as fluctuating income that might include quarterly bonuses, performance pay, refunds, or investment windfalls. Budget what you can count on (if only more state governments operated this way).
Once you start making money, keep in mind it is better to use those salary increases to save more. Don't start spending for luxuries until you're sure you're staying ahead of the ball game. And don't forget to factor in inflation.
You are treading dangerous water when you overspend in your important budget categories. But if you do, you've got plenty of company. Most middle income families are spending more than they bring in. This doesn't mean they're all ready for the soup kitchen or the Poor House, but it's definitely a sign they need to make some serious spending cuts. Remember that credit cards are not a solution to spend more than you make. In the end, you limit your spending power because of credit cards.
A nice budgeting trick is to only spend 90 percent of your income. If you do this, use the other 10 percent to save for your long-term financial big picture goals. You'll be surprised how that extra cash will add up.
Financial planning starts with budgeting and having smart goals. If you want to achieve any kind of financial goal – long term or short term – take the first step of finding out where your money is going, because chances are you don't know the answer to that question right now. Financial planning is also about having “smart” goals. Be on the same page with your spouse. There are tools to help you get started budgeting and setting “smart” financial planning goals. The most important thing of all, of course, is this: get started! The journey of a thousand miles begins with the first step. Learn how to budget. Establish smart goals. Take that first step!
Good luck on your new journey.
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