Financial Planning Example Using A Real Life Situation!
In this financial planning example, we'll use a FitBUX Member's real-life situation. However, we won't use his real name. Instead let's call him "Conor." "Conor" is a physical therapist who just graduated.
"Conor's" Initial Mistake: The Rat Race
"Conor" went to his student loan servicer, financial planner, and real estate professionals. His actions aren't a "mistake." However, his situation highlights how traditional financial service companies make planning harder, not easier.
His loan servicer recommended that he go onto Revised Pay As You Earn (REPAYE) for his student loans. "Conor" didn't realize they have to tell you by law
the plan you qualify for with the lowest monthly payment. Most of the time, this results in one of the income-driven repayment plans. In short, it's not a recommendation but a requirement they must tell you.
"Conor" then went to a financial planner. His financial planner told him that REPAYE sounded good for his loans (although he really didn't know what it was) and that he should speak to a mortgage broker to figure out how much home he could afford.
So "Conor" went to a mortgage broker. The broker told him that he qualified for a $650,000 mortgage. "Conor" didn't realize this is how much he qualified for, not how much he could afford.
Armed with this information, "Conor" went back to the financial planner and paid $750 for a financial plan. The plan had him going onto REPAYE for his loans and buying a house with a $650,000 mortgage.
"Conor" came to FitBUX and had us run this financial plan in our new simulation technology. Had he followed his financial planner's plan, he would've been in financial ruin in 15-20 years (or age 45-50, which is when most people realize their financial plan isn't what they thought it would be).
The only way for him to "survive" would be for both him and his wife to continue working. In short, he and his fiance would be working to pay off debt, i.e. they would be stuck in the rat race.
"Conor" then used FitBUX to help him develop a financial plan.
The First Step: Your Goals
The first step in any financial plan is listing out where you want to go, i.e. write down your goals. In this financial planning example, "Conor" had 5 goals:
- Pay off student loans
- Get married
- Buy a house
- Have 3 children
- His fiance would love the flexibility to stay home with the kids down the road
Step 2: Income & Expenses
The second step is to write down you income and day-to-day expenses.
One key here is not to include asset allocations, debt payments, or insurance premiums. These include items such as 401k contributions, IRAs, student loan payments, life insurance premiums, etc... These items come in the next steps.
Here is an visual for your reference in this financial planning example:
Step 3: Asset Allocations & Debt Payments
The third step is deciding what percentage of your total income goes to building assets (such as retirement accounts, savings for goals, etc...) and debt payments.
Step 4: Risk Management
The fourth step is risk management, i.e. insurance. In this financial planning example, "Conor" has health care and dental insurance that he pays for. Therefore, he'd enter these premiums.
Step 5: Pause and Reflect
At this point, you should know how much is left over after your day-to-day expenses, asset allocations, debt payments, and insurance premiums. We call this left over amount "Vacation/Fun Money".
There are two primary keys to evaluate at this point:
- Look at what percentage of your income is going to each category. Don't look at the actual dollar amounts to determine if you are not doing enough or doing too much of one thing. This will make it easier for you to determine where you should cut spending and/or where you need to be putting more of your income.
- Evaluate how much Vacation/Fun Money you have left over or how much you don't have. Then go back to steps 2-4 and allocate more or less to your desired category.
In our financial planning example, after completing these steps, "Conor" had $371 in Vacation/Fun Money left over each month which was good for him.
In addition, our technology
and his FitBUX Coach
were able to illustrate to "Conor" that he should be paying off his student loans aggressively and that he could only afford a $400,000 house instead of a $650,000 house.
Step 6: Enter Your Life Events And Goals
This step only applies if you're using FitBUX's technology. This is when you'd want to enter all your upcoming life events and goals. In our financial planning example of "Conor", he would put in getting married and his savings goal for the wedding, buying a house, having three children, and his wife staying at home once they had children.
Step 7: Simulate The Results
The key here is to evaluate if your financial plan allows you meet both your long-term and short-term goals. If your plan does, then all you have to do is implement your plan.
If it doesn't, you have to go back to steps 2-4 and change where you are putting your money and/or prioritize your goals.
In our financial planning example, "Conor's" plan was perfect. It allowed him to pay off his student loans in 3 years, get married, buy a house, have 3 kids, and gave his wife the ability to stay at home if she wanted to! If they followed this plan, by retirement, they'd have between $2.9 and $3.6 million dollars!