- The objective of a good financial plan is simple: Control your money so it doesn’t control you.
- That plan starts with setting goals, as specific as possible, then prioritising those goals.
- It’s also smart to make sure you have the appropriate insurance coverage, so an unexpected emergency doesn’t push you too far off track.
- Remember that your financial plan will probably need to grow and change along with your circumstances.
- This article is part of a series focused on millennial financial empowerment called Master your Money.
I’ve had a planner’s mindset for as long as I can remember, always thinking a step or two ahead and meticulously charting a path to achieve my goals. When I told my family, friends, and colleagues last year that I’d be pursuing the financial-planner certification, few seemed surprised.
Over the past year, I’ve spent hours upon hours learning and studying the ingredients of a good financial plan. There’s a lot that goes into it, as you might imagine, but the objective is simple. Control your money so it doesn’t control you.
Whether you create the plan yourself or collaborate with a professional, you set the goalposts, you make the rules, and you reap the benefits of a job well done. As Marguerita Cheng, a certified financial planner, wrote in an article for Business Insider, “no two financial plans are the same.” Not only does a personal financial plan give you guidance on how to use your money wisely, it also helps keep you on track.
When the coronavirus pandemic upended financial markets in February, America was collectively caught off guard. As chaos ensued, Eric Roberge, a certified financial planner and a member of Business Insider’s Money Council, sent an email to his clients, which read in part: “Feeling concerned about what’s going on is normal and not a problem. What can pose a problem is acting on those emotions and deviating from the set course of action you have in place as part of your long-term plan.”
Roberge goes on to say that a financial plan should keep us grounded when everything is going haywire.
“Throwing your plan out the window right now because you’re scared is like taking your life vest and flinging it as far from you as possible because you’re worried about the ship sinking,” he says.
The first step of making a financial plan: setting goals
Let’s state the obvious: If you don’t know where you’re going, it’s difficult to get there. By failing to identify a destination, you might find yourself skidding into the next stage of life with the cash left in your pocket rather than the abundance you had envisioned.
That’s why every financial plan starts with naming your goals. The more specific you are, the more tailored your plan can be.
“The main point of financial planning is to use your money as a tool for life,” Roberge said during a conversation with Business Insider’s Money Council in March. “One of the first things that I do with my clients, all of whom are 30- and 40-somethings, is say, ‘You know what: Let’s drop the numbers, and let’s just brainstorm the board here.'”
What do you want your net worth to be in 5, 10, or 15 years? Do you want to own a home? Start a business? Pay off your debt? Raise a family? Support relatives? Give your kids a debt-free college education? Go back to school? Take a luxury vacation twice a year? Retire to Costa Rica? Leave a heap of money to your kids and grandkids?
These questions are crucial in deciding how to spend, save, and invest your money right now. But so are the philosophical questions. What does it mean to be financially successful? What can I do now so that I don’t have to worry about money later in life?
Your answers to these questions will help you form a list of goals; the next step is prioritising them. Roberge challenges his clients to go through theirs and ask, if I could do only one of these things, what would it be? Next, move that goal to a priority list.
“Once you get that list, then it’s as simple as going back to your budget and creating a cascading effect of cash. Where does the first dollar go? It should go to the most important goal and continue down the list like that,” Roberge says. “If you can achieve everything, great. Most times we can’t achieve everything all at once. So we might have to adjust the timeline or the amount that that goal costs.”
After establishing goals, it’s time to work backward
The next step is to lay out the hard numbers, starting with your expenses, income, assets, debts. When you work backward – first identifying your goals and then returning to look at your financial situation – you can allocate your cash and figure out what else it might take to hit those future milestones.
If you work with a financial planner, they will create a cash-flow statement showing how much is going in and out of your accounts each month and a statement of financial position, or a personal balance sheet, to calculate your current net worth.
If you’re creating a financial plan yourself, you can use apps to track your cash inflows and outflows and monitor your net worth. Any investment accounts, such as a 401(k) through your job or a taxable account where you trade stocks, will be considered assets along with any savings accounts or personal property you own. Credit-card balances and student, car, and home loans are your liabilities.
By analysing these financial snapshots, you can figure out how to get your current spending to match up with your goals. If you’d like to start a college fund for your kid or save up for a big vacation but you don’t have money left over after bills are paid, where can you free up cash? Paying off a loan might help – or cutting back on spending.
For far-off goals like retirement, you might need to spend more time crunching the numbers or consult a financial planner who can do it for you, to figure out exactly how much to save and where to invest.
In some ways, putting your financial plan into motion is like a game of chess. You have a result in mind, but it’s going to take some calculated moves, and a dash of motivation, to get there.
Don’t overlook insurance
Part of a good financial plan is preparing as best as you can for life’s hiccups. One way to do that is with insurance.
“You can make the most beautiful plan in the world, and then the ‘what if’ scenario happens that you weren’t expecting, and then it blows the whole thing up,” Roberge says.
Everyone should have health insurance. Doctor visits, prescriptions, and emergencies can be expensive even if you have coverage, but they will really break the bank if you don’t. Most people need homeowners or renters’ insurance to protect against unpredictable disasters and mishaps. If a storm hits or a fire breaks out, you won’t have to pay the full cost of the damage if you’re properly insured.
If your career is your largest financial asset, you might want disability insurance to replace it in case you ever get injured or become too sick to work, even temporarily. Lastly, anyone who supports someone else financially, whether a spouse and children or other relatives, should have life insurance. It’s a small price to pay for assurance that your loved ones will have money to fall back on if the unthinkable happens.
If you slip up, get back on track – tomorrow, not next month
Unfortunately, the mere existence of a financial plan doesn’t guarantee discipline. You might make a mistake, veer off track, or make an impulsive decision in response to a crisis like the one we’re living through now.
“When you’re looking at your spending for the month, if you go over on a category and then you say, ‘OK, well, I’ll just start over next month,’ I always tell people that’s not the way to go about it,” Katie Oelker, a financial coach and member of the Money Council, says.
“It’s the same with nutrition or health goals,” Oelker says. “It’s not like, ‘OK, I’ll just start over next month’ or ‘I’ll start over next year,’ but it’s ‘OK, what can I do for the rest of the day to make this better?’ Or ‘What can I do tomorrow to make this situation better?’ So maybe it’s ‘OK, if I overspent on this category, is there another category that I can cut back on for the rest of the week or month?'”
Give yourself some slack, and know that your plan is meant to guide you, not dictate your every dollar. Plus, your plan will likely need to change as your circumstances do.
“Looking at it that way and being a little bit more flexible, but also try not to beat yourself up knowing that it is going to happen, and that, instead of just viewing it as like a monthly plan or a yearly plan, taking it one day at a time and one financial decision,” Oelker adds.
And, most important, don’t forget to reward yourself for hitting milestones along the way, says Scott Pedvis, a financial adviser at Wells Fargo and member of the Money Council. “You need goals, but you need to be rewarded for achieving those goals.”
- Read more:
- How the American millennial is overcoming debt, the dollar, and the economy they were handed
- How to pay back your student-loan debt, no matter where you start or what type of loans you have
- 6 alternatives to an expensive undergrad degree, and what exactly to do to avoid massive student debt
- Student-loan debt can be overwhelming. BI’s Money Council is here to help, with advice on repayment, tax credits, and active planning so you can achieve your goals