The Ultimate Guide To Financial Planning For Beginners

Financial planning sounds about as fun as drinking tap water in Mexico… that is, it just doesn’t have an appeal to it. While having a sound financial plan for you or your business won’t result in Montezuma’s Revenge, not having a plan in place will certainly affect you in ways that isn’t unsimilar. So, let’s dive into what you need to know when you have decided to finally take a step in the right direction when it comes to your finances. I promise you it won’t be as bad as you think.

First Things First – What Financial Planning Is And Isn’t

This article details myths about financial planning that you may have heard about before. We won’t get into great detail in this article but it is a good idea to have an understanding about what is true and untrue.

First off, there is no better time than right now to get your finances under control. Sure, you currently may be stressed with saving for the future. We get it – why would you want to spend even more of your well earned free time on things as tedious and boring as financial planning? The fact is that the sooner you get your plan set up and moving along, you’ll quickly realize that you will have more free time than you thought (and you’ll begin to see your savings swell month after month). 

Financial Planning

Keep in mind that you do not need to already be wealthy to develop a plan for your finances and savings. Sure, if you need to manage millions of dollars, it would probably be wise to hire an experienced CPA to provide you with professional services. But, what if you are just starting out in your career? You may not need to hire a professional and can instead turn to many low cost alternatives available online. Resources found online can expose you to tips and ideas that you may have overlooked or didn’t even realize existed. Also, friends and family who are involved with their own financial planning are also great resources to utilize. Don’t be afraid to ask questions.

Finally, realize that financial planning is not a “set and forget” strategy to help grow your wealth. Your financial plan is a fluid and living strategy that must always be adjusted, tweaked, and modified depending on factors such as:

  • Inheritances
  • Increases in income
  • Decreases in income
  • Lottery winnings
  • Business acquisitions and mergers
  • …and many more.

Financial Planning Basics You Need To Be Aware Of

Master Your Budget

Financial Planning

If you aren’t keeping track of your money, you cannot possibly understand how your money can effectively work for you. Are you visiting Starbucks everyday on your morning commute? I’m not trying to tell you that you’re wrong for doing that, but, if you haven’t budgeted for that $7 coffee, you’ll always wonder why you’re bank account is short $140 every month. The little purchases here and there certainly add up. If you can get your budget under control, you’ll be surprised at the amount of things you’ll realize you don’t need anymore (for under $70, you can get this coffee pot, this coffee, and this mug – that’s less than half of what you’ll spend at Starbucks this month).

Have An Emergency Savings

Dave Ramsey recommends that everybody who starts a good financial plan to put away $1,000 for emergencies. When hot water heaters fail or you have a tire blow out, having an emergency savings will allow you to take care of these problems without having to budget for them out of your monthly income. 

Destroy Your Debt

The next thing you need to focus on is getting your debt under control. Your financial plan should include a realistic strategy that deals with getting your credit card debt, medical debt, and student loans. There are many methods that can help you manage this task. Once again, look into the “debt snowball” method recommended by Dave Ramsey.

Grow Your Emergency Savings

Financial Planning

Once you have paid down all of your debt, it’s time to increase the size of your emergency savings so that you can survive for a half of a year should you lose your job or become unable to bring in income. In order to do this, you will have needed to have mastered your budget. This information will allow you to know exactly how much you are spending each month on things such as:

  • Groceries
  • Recurring bills such as utilities, phone, internet, water, garbage, etc.
  • Clothing
  • Gift giving
  • Prescriptions
  • Insurance payments
  • Vehicle expenses such as fuel, repairs, and maintenance

Remember, these are recurring bills, not debt. Debt should have already been taken care of by this point. For a typical household, this emergency savings will be in the range of $42,000 to $54,000.

IMPORTANT – this is an emergency savings and should never be used to purchase anything other than things needed for emergencies. Resist the temptation to use it for vacations, extravagant gifts, or loans to family or friends.

Plan For Retirement

Once you have a robust emergency savings built up, it’s time to begin saving for retirement. Take advantage of your employer’s 401(k) program, Roth IRA’s, and possibly even investing in secure mutual funds. Be wary of the precious metals industry. While it may seem like a good idea to invest in gold, silver, and other precious metals, understand that the precious metals market can be very volatile. Also, be extremely wary of cryptocurrencies as their values are unregulated and can radically fluctuate. A good rule of thumb is to have a diverse investment portfolio. There are a bunch of financial planning resources that can help guide you along the way.

Pay Off Your Mortgage

Once you have gotten your financial plan underway and you have paid off all of your debts and built a good emergency savings, it is time to pay off your mortgage. Without all of that debt, and a brand new coffee maker in your kitchen, you can now funnel all of your newly freed funds to supercharge your ability to pay off your mortgage. Can you image – your home paid off. No debt. A large emergency savings. Investments that are paying off. This is the very definition of financial freedom.

Financial Freedom = Freedom To Do What You Want

Dave Ramsey says it best – “If You Will Live Like No One Else, Later You Can Live Like No One Else.” In other words, if you are willing to make the sacrifices other won’t make now, you will eventually be able to live a better life than those who are cruising through life without a sound financial plan.

You can do this. The journey of a thousand miles starts with a single step.