Create a Personal Financial Plan
Posted by P.B. | Posted in Uncategorized | Posted on 09-04-2010
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If you are like me, this probably snuck up on you. April is National Financial Literacy Month!
It’s a fairly new observance, to improve financial literacy among American teenagers. In 2004, the U.S. Senate passed a resolution in support of a Financial Literacy Month for all. This was due to the recognition of “pervasive financial illiteracy among adults” (who apparently never learned what they should have when they were teens).
To do my part to help all of us become more financially savvy, I want to write series of posts during April focused on basic principles of personal finance. I will probably include links to some articles I have written here in the past that you might not have had the chance to read.
Below is my first post in the series on creating a financial plan.
A question I have asked myself countless times over the years is “Why do I keep making the same mistakes with my finances?” From various sources I have found my answer: making spending and investment decisions apart from a personalized financial plan. No matter how good you think your financial decisions are, if they’re made outside the framework of a larger plan, you’re inviting trouble. Read on to discover the main bases you’ll want to touch at each phase of life as you construct a solid financial plan of your own.
Unfortunately, if you are like me, I have too often told my wife “we’ll work out the details as we go along”. In effect, we are all saying I want a poorly designed life of making financial decisions and hope everything works out ok in the end. The good news is this doesn’t have to happen to you. Get 2010 off to a good start by setting aside time this month to create a personalized financial plan that’s designed to build the kind of future financial home you’ll enjoy.
The first step is to set good financial goals. You will want to write them down, consolidate and refine them, prioritize them, make them measurable, and keep them visible. Set good goals and keep them in front of you—you’ll be surprised at how much more productive and focused you’ll feel as you start living with a clearer purpose.
The second common denominator of all good financial plans is a spending plan (i.e., budget). You may not like it, but it’s an absolutely essential tool for everyone-. Without a spending plan, you cannot implement saving and investing strategies because you don’t know if you have any extra money to save or invest.
Even if you seem to have extra money left over each month, without a budget you won’t know if that money should be saved for those once-a-year items (such as insurance premiums and summer vacations) or if it truly represents a surplus. Also, it’s unlikely you’ll be in a position to give generously to God’s work if you don’t plan for it.
As you work through your goal-setting and spending plan, remember that this is a spiritual endeavor, not merely a mental one. Your personal financial goals and budget will reflect how you view and use money. As Christians, we are managers rather than owners, and we should allow God to speak to us regarding our plans for His money. Married couples should make these planning decisions together, not just because it ensures “buy-in” from both parties, but because it establishes you as a team rather than opponents.
While there are no “one-size-fits-all” financial plans, certain experiences are common to particular phases of life. As you read the following scenarios, don’t get discouraged if you feel “behind.” Your situation will probably differ somewhat from what’s here, so make sure to personalize these to your individual circumstances.
THE YOUNG PERSON/COUPLE
For many young people these days, youth translates financially into “easy credit and lots of debt.” More than likely, the first decade out of school is spent paying off school loans, car loans, and credit card bills. Sound bleak? It doesn’t have to be. Unfortunately, many young couples waste the most productive financial years they’ll have for a while: those early marriage years when both spouses are likely working and there are no kids in the picture yet. This is a great opportunity to make headway financially, but all too often that does not happen due to lack of planning (and because there’s so much fun stuff to buy!). Here’s what’s needed:
- Make a budget, relying on your current spending to establish realistic initial estimates in each category. Usually this requires a period of tracking your expenses carefully to ensure your budget is using realistic figures.
- Attack your debt, while avoiding further debt. This is tougher than it sounds, since most young people have yet to establish a savings reserve from which to absorb unexpected expenses. List all of your debts, including balances and interest rates. There are two main debt-payment strategies to choose from. If you are highly disciplined, you will save the most money in interest expense by paying off your highest interest rate debts first. But the one I am using with good success is the “debt snowball” approach, in which you pay off the debt with the lowest balance first, then the next lowest, and so forth.
- Start building your emergency fund by opening a money market account and having money automatically deposited into it each month. For most people, it’s a good idea to start saving a small amount even before they’ve finished paying off their debt. A savings account balance of three to six months living expenses is routinely recommended by financial planners. That may seem like a lot, but you’ll have plenty of use for it if buying a house or having children are on the horizon.
- Take advantage of free money at work by contributing to your retirement plan up to the amount your company matches.
- Fund a Roth IRA. A Roth IRA, funded in your twenties or thirties, is an incredible deal. You’ll get 30+ years of compound growth, then get to take that money out tax-free!
- Start saving for college.
THE MIDDLE-AGE COUPLE
If you are in this category like me, you should consider the following to include on your priority list:
- Revise your budget to reflect your new level of income and expenses. This budget revision should be an annual event anyway, but I’ll include it in case you haven’t adjusted your budget in a while.
- Take a financial inventory of your household. What debt do you have outstanding? What needs are coming up—additional school payments, cars that need replacing, home repairs you’ve put off? At this stage of life, debt should be pared back to bare minimums. If you haven’t already done so, pay off those credit card balances, car loans, and other consumer debts.
- Get realistic estimates of how much money you’ll need to retire. Having specific figures in mind will help motivate you.
- Maximize your retirement plan at work. Your 401(k) or other retirement plan at work probably represents your best opportunity to quickly save large amounts for retirement.
THE RETIREMENT COUPLE
I will try to tackle this in another post.
Don’t procrastinate! Just sit down and get started. It does not have to be perfect, nor does it need to be complete. You will find things along the way that will need to be added/changed. Not sure where this quote came from but…
“Failing to plan, is planning to fail.”
Get to planning!



