What Is the First Step in Financial Planning?
Do you feel as though you're constantly struggling with finances? With everything going on these days it's more important than ever to get your finances under control. Perhaps you're considering building your own financial plan but haven't taken financial planning seriously in the past.
You may wonder - what is the first step in financial planning?
Below, we'll outline the first step in financial planning.
Breaking Down the Different Components of Financial Planning
There are several components of financial planning that are essential to know and understand before you get started. The components include (in no specific order):
Financial goals
Estate planning
Net worth statement
Debt management strategy/plan
Budget plan
Emergency funding
Insurance
Retirement
Each is important on its own. For example, retirement planning is essential because the day you stop working, you will need to know where you plan on pulling funds from for ongoing spending needs.
Many companies offer their employees a 401k, which allows you to make contributions to save and invest toward your retirement and will be a component of your retirement income when you decide to retire. Some employers may even match a certain percentage of your contributions, which is a great way to save more for retirement. While you may utilize funds earlier, the IRS will eventually require you to pull from these accounts once you a certain age, known as Required Minimum Distributions or RMDs.
Another important component is the emergency fund. While nobody wants to think about bad things happening (broken down car, loss of a job, etc.), these are times when having an emergency available to access and cover these unexpected expenses is important. By having a properly funded emergency fund you can help avoid having an inconvenience become a crisis. Financial stress is something that can be avoided if you plan properly.
Understanding Your Financial Situation and Needs
When building out your financial plan, it's essential to understand the difference between your financial wants and needs. This will also help frame up and make the conversation with your financial advisor productive. It helps detail in a meaningful way the things you want to allocate your time and money to.
When determining the retirement spending needs, you'll need to build out a budget to understand and track your expenses. Typical expenses that many people have include:
Housing related expenses (Mortgage & Property Taxes)
Transportation including gas
Insurance (car, life, etc)
Gas and other utilities
Food and grocery bill
Entertainment
Taxes
Travel
Healthcare
After you determine your list of expenses, the next thing you'll need to do is lay out your wants. Wants are extracurricular activities that don't always happen, but you still want to do them because you enjoy them.
This can be things like taking annual trips or going to the movies. Properly allocating these expenses and identifying which ones are essential is very important. Usually this will be the excess money after you have identified and covered your essential expenses, like the Mortgage, Food, etc.
If you want to budget better, you might consider reducing the amount of money you put aside for your wants and other discretionary activities.
Identifying Your Current Financial Goals
When you speak with your financial advisor in Maple Grove, one of the first things you're going to do is determine what financial goals you want to achieve. The first step in determining these goals is to ensure they're specific and measurable.
If the goal is too broad, it can be challenging to achieve, and if it can't be measured, you're not going to know if you're progressing in the way you'd hoped. Next, ensure your goals have a deadline for when you would like to reach them. Take some time to think about what you want life to be like, this will help you identify your goals.
Lastly, remember to write your goals down somewhere where you can see them and keep track of your progress.
Establishing a Budget for Your Plans
When establishing a budget to achieve your financial goals, you understand what your monthly cash flow is from your job or retirement funds. This will help you to understand what you're bringing in biweekly and monthly after taxes from either your wages or retirement accounts.
Next, take some time to track what you spend your money on. This will make it easier to understand the ratio between what you're spending and what is coming into your bank account.
Ensure you set realistic goals for yourself, as mentioned above, and from there, adjust your spending based on the budget. After you set your budget, don't forget to track it, and potentially adjust as your needs and wants change.
Setting a Plan of Action with Professional Assistance
Sometimes, it can be challenging to stay the course when you're the only one who knows and is executing the plan. However, it can be easier if you sit down to discuss and set your plan with someone who works in finance, like a financial advisor.
A Minnesota financial advisor can sit down with you and help you set your goals and take a deeper look into your finances. In many instances, they can help identify the length of time it will take to achieve those financial goals.
They can also be transparent and provide suggestions about things that need to take place if you want to reach your goals or the opportunity costs of one goal versus another. When speaking with your financial advisor, it’s important to be honest with them. That is the only way they can have a meaningful impact.
If you aren't upfront about your finances, or realistic about your goals, it can be hard for them to help you move forward and make progress.
What Is the First Step in Financial Planning?
When dealing with money, the first step is understanding the components of building a financial plan.
If you're ready to speak to a professional about your future finance goals, contact Phillip James Financial and let us show you how to plan and invest with purpose.
We can help bring it all together so you can feel confident in your financial future.