What are the basics of personal financial planning?
The most important step to personal finance planning is to start with a basic plan.
What is a basic financial plan?
We are talking basics here, so forget about debt reduction, emergency funds, retirement accounts and all the fancy phrases you read in personal finance articles.
If you are new to financial planning then you want to start small. Starting with the right foundational principles will make your planning incredibly successful.
The first step is to determine why you want to set up a personal finance plan.
Obviously, this is going to be different for everyone, but for me, I wanted to set up a plan for the following reasons:
- I didn’t want to live paycheck to paycheck
- I wanted to have money for retirement
- I wanted to be able to take vacations and live my life rather than worrying about money.
I have more detailed reasons, but honestly, when I broke everything down it really amounted to the fact that I wanted to be in control of my money.
Unless you have a reason to revamp your finances and get your financial life in order, you aren’t going to be dedicated enough to change. People need concrete reasons to sacrifice for a better future.
So once you have your reasons for organizing your financial life you are now ready to set up your basic personal finance plan.
What do you need in a basic personal finance plan:
1. Set your personal finance goals.
For most people, this involves budgeting, debt reduction, emergency funds, personal organization, and retirement.
Choose two or three areas that need improvement.
The important thing is to set specific measurable goals over an extended period of time. Ideally, you will set goals for 1 month, 6 months, 1 year, 5 years . . . . . you get the idea.
The most important part of this step is writing down your goals. There is something about writing a goal on paper that give you purpose and direction.
2. Write out a clear plan for accomplishing your goals
Goals are just dreams until you take measurable steps to accomplish them. The trick here is to write down a clear plan for accomplishing each of your goals.
I recommend starting out simple if personal financial planning is new to you.
If your goal is to save $23 a week, then write down how you will accomplish this goal.
It can be as simple as “I’ll take my lunch to work 3 days a week. I’ll make my own coffee rather than stop at Starbucks. I’ll use coupons at the grocery store and meal plan.”
When I’m setting goals I work backward.
For example using the goal above. I would have made a goal to save $1200 in a year. This means I need to save either $100 each month or $23 a week.
If you are new to personal finance than saving $23 a week would probably be the easiest way to accomplish this goal.
To be honest, I don’t think the numbers are really all that important. What matter is that you are setting goals and working towards them.
The larger numbers will come as you learn word towards and accomplish your goals.
3. Review your income and expenses
This is important not only for budgeting purposes but is often a reality check for many people.
Most people don’t have a clue how much they are spending on groceries, gas, eating out, clothing and all the other random stuff it takes to run a household.
You can’t meet your financial goals unless you can learn to control your spending. One of the two unbreakable rules to budgeting is to never spend more than you make.
You won’t know how much you are spending until you start tracking your money.
I personally use Quicken to track my money. However, it is a more complicated program that doesn’t work we’ll for everyone. I’ve also used Mint which is a free online service through Quicken.
I used to use an excel spreadsheet, the method of tracking doesn’t matter, just start tracking your spending.
4. Determine your ideal budget method
I know everyone hates the dreaded “B” word, but having a budget is critical to the success of your personal finance goals. Don’t go crazy and overboard. If you’ve never done a budget start out simple and realize it is going to take a minimum of 3-4 months to dial in your income and spending to make a budget work.
Based on your income, expenses and money habits you’ll want to use a zero-based budget, an irregular income budget or a 50/30/20 percentage based budget.
I do the zero-based budget for my PT work and Aaron’s base pay and then budget his commission on a modified irregular income budget.
Choose a budget that works well with your temperament, financial position, and personal preference.
The type of budget isn’t as important as having a budget and following it.
Why you need a basic financial plan:
If you will follow these four simple steps you will have the foundations for a long-term personal finance plan.
I’ve known way too many people who get excited about organizing their personal finances, they jump in deep and burn themselves out.
Keep it Simple!
Once you have the basic foundational plan then it is easy to adding the extra’s like debt reduction, retirement savings, emergency funds . . . . the list goes on and on. Once you get started and have control of your money you’ll discover a whole new world.
Personal finance is a lot of fun!