Personal Financial Planning Example: The Situation
In this personal financial planning example, we'll use a FitBUX Member's real-life situation. However, we won't use his real name. Instead we'll call him Conor. Below are Conor's details and the information we'll be using throughout this financial planning example.
- Just finished his DPT (Doctor of Physical Therapy) making $75k per year.
- $100k in student loan debt
- Engaged and his Fiance is also a PT making $72k per year with no student loan debt
- Getting married in 1 year
- Wants to buy a house in 3 years
- They would like to have 3 children
- His Fiance wants the ability to choose to stay at home once she has children.
The Mistake Most People Immediately Make
Conor went to his student loan servicer, a financial planner, and real estate professional. His actions highlight how traditional financial service companies make financial planning harder, not easier.
The Loan Servicer
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, what a student loan servicer tells you is not a recommendation but a requirement they must tell you.
The Financial Planner
Instead of going to an expert student loan planner, Conor went to a traditional financial planner. His financial planner told him that REPAYE sounded good for his loans (although he really didn't know what it was). His reasoning was that it gave him the lowest student loan payment and would allow him to save for his house.
Conor then asked the financial planner how much home he'd be able to afford. The planner told him he wasn't sure and that he should speak to a mortgage broker to figure it out then come back to him so he could finish his plan.
The mortgage broker Conor meet with 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 $2,100 for a financial plan. The plan had him going onto REPAYE for his loans and buying a house with a $650,000 mortgage.
His Next Steps
Conor came to FitBUX and had us run this financial plan in our new simulation technology. Had he followed his financial planner's advice, he would have found himself 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.
Below details how Conor used FitBUX's technology and a call with his FitBUX Coach to develop a plan that worked. You can take these same exact steps!
Step 1: Setting Up Your Plan
There are three distinct steps to financial planning: Setting it up, simulating and reviewing it, and implementing it. The first step is broken down into five components:
My Day-To-Day Money
My Future Goal Money
Money To Manage Risk
Step 1a: Goal Setting
Write down all your major life events coming up such as getting married and write down your goals. List them from short-term to long-term because short-term goals are were you are going to be focusing most of your attention.
In our financial planning example of Conor, he is getting married in a year then buying a house in three years. Therefore, his top goal is saving for his wedding. Once he accomplishes that, he can move onto saving for a house.
Step 1b: My Day-To-Day Money
The next steps are ones that many people are familiar with. It is a budget. However, most people budget incorrectly.
You must organize your budget in a way that makes so its not a chaotic mess of numbers. Step 1b - 1d do just that.
Step 1b consists of your income and day-to-day expenses. In our personal financial planning example to the right, you can see Conor listed his salary and daily living expenses such as food and rent.
If you want more information on how to budget correctly, be sure to check out these resources:
Step 1c: Your Future Goal Money
Think about future goal money as money being used to take care of your future self. This means saving for short-term goals, investments, and paying off debt. All these things don't happen over night and take time. In short, step 1b is money for immediate needs. Step 1c is money for your future needs.
In our personal financial planning example, Conor was going to save for the wedding then save for the house. However, his FitBUX Coach showed him how saving for the wedding then paying his student loans off aggressively made more since.
In fact, Conor's new goal was to pay off his student loans before buying the new house. In addition, our technology was able to illustrate to Conor that he couldn't afford a $650k mortgage. Instead, he should target a $400k mortgage or less!
Tip: Be sure to look at what percentage of your total income is going where instead of the dollar amount. More on this tip in Step 3.
Step 1d: Money To Manage Risk
Step 1d is often times overlooked when building a personal financial plan. However, it is one of the most important highlights a key money management tip we stress here at FitBUX: Manage your risk and your return will be there.
Step 1d focuses on protecting yourself, i.e. risk management. As I mentioned above, your future goals take time to achieve. What if you don't have time because of disability, death, health care expenses, etc...?
That is why this step is including money for insurance premiums. The way you can think about this step is money to protect my financial plan.
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".
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.
Step 1e: Your Emergency Fund
The last part of step one is to set your most important financial goal: your emergency fund. Now that you know your day-to-day expenses and debt payments, setting up the emergency fund should be easy. All you have to do is decide how many months of expenses you want in your bank account and you are ready to move onto step 2!
Step 2: Simulate The Results
This is were the majority of financial plans fail.
The key here is to evaluate if your financial plan allows you to 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 step 1 and change where you are putting your money and/or prioritize your goals.
In our financial planning example, Conor would have failed in the long-term because the financial planner he paid skipped this step. By using step 1 to set up his plan and simulating the plan using FitBUX's technology, he was able to see exactly how he could pay off his student loans in 3 years, get married, buy a house, have 3 kids, and his wife would have 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!
Step 3: Implement Your Plan
This is where you can make your financial life really easy. Each month, quarter, and year don't evaluate your plan based on how much money you put where.
However, most people look at absolute dollar amounts which makes life very stressful. Instead, look at what percentage of your money went where and compare that to the percentage that your plan was supposed to be.
In our financial planning example, Connor is going to put 25% of his total income to student loans each month/year. At the end of the month, all he has to do is see if he put 25% to student loans.
The reason this makes your financial life easy is two fold:
When you get a pay increase you'll automatically know how much to increase the amount going towards each goal. I.e. If Conor gets a raise, he simply multiplies his new income by 25%, adjust his payments, and moves on with this life. Its instant accountability and reduces stress.
If you get a tax return or a bonus you know exactly what you are going to do with it. For example, if Conor got a $1,000 bonus, then he knows $250 is going straight to his student loans. The other amount he can spend however he'd like and not stress about it!