In my opinion, the more you simplify things the more likely you are to achieve your goals. This article discusses 5 financial planning steps you can follow to make building your plan and implementing it very easy.
Good news! If you do these steps, you don’t need to waste money on a financial advisor.
You can also watch the video version of this article below:
Step 1: Set Your Goals And Potential Life Events
You can’t plan if you don’t know where you are going. For example, if someone asked you to give them directions, you’d ask them where they are going. If they responded, “I don’t know just give me directions” you’d look at them like they are crazy.
Financial planning works the same way. You have to know your financial goals (both long-term and short-term) as well as other life events.
Goals consist of items such as saving for a car, wedding, home purchase, paying off debt, etc… The key is to prioritize them and focus. As I’ve previously have stated, prioritizing and focusing on major key to financial success.
Life events are things that affect your finances such as getting married, having children, inheritance, moving, going back to school, etc…
Remember goals and life events because I’ll be referencing them again in step 5.
Step 2: Understand Your Current Situation
You also need to understand your current circumstances. Your circumstances include where you stand today, how much financial risk you currently have, and understanding how impactful mistakes might be.
Most people fail to do this or a “financial expert” they are working with will simoply givs them a .pdf print out. To put it mildly, it is often just a chaotic mess of numbers that they don’t know how to interpret.
First things first: you need to build a budget. A lot of people do this but they 1) do it incorrectly and/or 2) stop after building a budget but should do more analysis.
I detail extensively how to budget correctly in another article but there is one key piece of the financial planning process I’ll include in this article. When you first build your budget, only put in your actual day to day expenses and minimums.
By minimums I mean items such as minimum debt payments on auto loans, student loans, mortgages, etc…
Also, at FitBUX we suggest putting the minimum amount needed into your 401k to get your employer match as well as $25 – $100 a month into a Roth IRA. For now don’t worry about the remaining money, we’ll get to that in step 3.
Before moving to step 3, I want to deeper dive into knowing where you stand today, how much risk you have, and how impactful mistakes might be.
Diving Into Step 2
Knowing where you stand today is much more than just doing a budget. For example, your income and background plays a massive role in your financial plan and most people tend to overlook it.
The type of income you have (salary, commission, hourly, 1099, self-employed, etc…) influences how much risk you have in profile. Your education level as well as other items greatly influence your income levels today and in the future. Other characteristics such as working out, playing sports, etc… capture behavioral traits that speak to your discipline. Said discipline, or lack thereof, will impact how you behave when it comes to financial planning.
All these things combined is what we at FitBUX call human capital and it has a value, just like any other asset.
Your human capital is the most important asset when you are younger. It literally dictates everything you do financially such as how you pay off student loans, how much home you can afford, whether you should buy or rent your residence, what type and how much insurance you need, etc…
When you combine human capital and your finances you can then determine how risky your overall financial situation is. You can also determine how much flexibility you have to make mistakes.
For example, let’s say you have really stable income with relatively low debt. You have low financial risk and can afford more home relative to someone with unstable commission income even though they might have low debt as well.
Unfortunately, it’s hard to look at this and easily tell where you stand. You have to take into account your income, expenses, assets, human capital, debt, insurance, etc… and figure it all out. It can quickly become overwhelming.
BUT DON’T WORRY! That is the beauty of the FitBUX Score. Based on our proprietary algorithm, t combines all your data into one easy to understand score.
Step 3: Prioritize And Focus
In step two, you built your budget and I said to only do the “minimums.” Now you have to look at your financial situation, look at your goals, and determine how you want to allocate the rest of your money to either saving aggressively towards a goal or paying off debt.
One major key is to focus. Most people try to do too much such as save in an IRA, their 401k, save for a house, pay off student loans, pay off their car, etc… Try to focus your extra money on 1 or 2 items such as paying off one debt aggressively and then after that makes out your savings, etc….
Once you allocate the rest of your money you are ready to move onto step 4.
Financial Planning Step 4
Most people stop at step 3 and that is a major problem because you don’t know if the plan you just set up will allow you to reach your goals. You must simulate the plan.
Once you simulate the plan, the key is to first analyze the long-term impact. Then you look at the short-term. If everything is good to go then you move onto step 5. If not, then you go back to steps 1 – 3 and make adjustments.
If you want to compare different options, you can build a second plan, simulate it then compare the outcomes side by side. Side note: hitting your short-term goals should take priority over achieving your long-term goals.
So how do you simulate and compare your options. There are various technologies but I’ll reference FitBUX’s technology because I’m most familiar with it and I think it’s the best (obviously I’m bias because we built it).
For example, when you build your plan using FitBUX technology, it simulates everything for you including any life events you include such as getting married, children, etc… You can even build multiple plans and compare them side by side.
Financial Planning Step 5
This is the most important part of planning and that is actually executing your plan. When you are tracking your plan, its key to track what percentage of your money is going where. From there the only time you need to update your plan is when you achieve your goals and/or you have a major life event happen.
In summary, you build your plan, track what percentage of your money is going where (i.e. actual vs planned), and update the plan at goal achieve or life events.
The key is to do this in an easy way and cost efficient way. Do you need a financial planner for this… I don’t think so. You can do a lot of this with technology.
What you are looking for in a technology is that it tracks your savings goals, your debt goals, tells you how you should have your investments allocated, tells you if you are following your plan or not and what you can do to improve your situation, and tracks your expenses.
One big item technology must have, when you hit your goals or life events you can go in and update your plan quickly so you can go back to the rest of your life.
If you need help implementing your plan be sure to check out FitBUX’s technology to help you with this.
By Joseph Reinke, CFA
