Financial planning 101
The basics for those who are just getting started
Talking about money is intimidating and figuring out how to create a budget for the first time can be daunting. But it’s important to learn about financial planning at a young age and to stick to your path in the years ahead. Very few people see their excitement levels peaking when thinking about IRAs, 401(k)s or rainy day funds, but if your life goals include buying a house, traveling the world, saving a nice chunk of change for retirement or preparing for a family, financial planning is key to making sure you’re never in a dire place.
Let’s start with the basics: What is a financial plan?
It’s a blueprint of where you’re at now and where you want be in the years ahead and then, finally, in retirement. Matthew Murawski, a financial planner for Goodstein Wealth Management, says you can start your plan at any age, but the sooner the better.
“It’s hard to reach your goal if you don’t know what your goal is,” he says. “Once we figure out what we’re trying to hit, we can reverse-engineer the plan.”
A successful plan requires you to establish several key components:
1. Financial position and goal setting
This is where you take a deep breath and establish your current financial situation. How much money do you have in your bank account? How much money is coming in every month? How much money is going out every month? What are you spending the most on? Where could you cut subscriptions, services or other items?
If you need some help, there are basic financial worksheets online. Moneyunder30.com has a simple budget worksheet you can download for free to help you get started.
Once you establish the basics, then make a list of goals. Make them specific and allow them to range from simple, achievable ones to more complex ones. Avoid squishy goals like “save more
money” and “eat out less.” Start by setting five short-term and five longterm ones.
2. Risk management
You never know what to expect in this crazy thing we call life. A car accident, divorce or other dire event can strike and you’ll need to have cash on hand, especially if you’re out of work. It’s also smart to plan for possible disability, life and miscellaneous insurance needs. Murawski recommends setting up an emergency fund.
“If you’re single, plan for 3-6 months of savings. If you have kids, aim for 6-12 months,” he says.
Look back at your financial positioning to see how much money you typically spend a month to establish your emergency fund number. If you’re seeking insurance advice, be sure to talk to someone who knows about the industry, not someone merely selling products within it.
3. Wealth accumulation
This is the point at which you can lay the groundwork for your future. Technically, it begins once you enter the workforce and ends when you retire. Murawski says it’s important to decide which accounts you want to invest in, including 401(k), Roth IRA, Traditional IRA, Simple IRA, SEP IRA, etc.
If your employer has a company match for its 401(k), you absolutely should take part in it. This is free money. Your contribution is automatically deducted from your paycheck, so you won’t even miss it (probably).
The go-to option for people who work for an employer that doesn’t offer a plan is an IRA.
Roth and traditional IRAs are easy to set up with assistance from any discount or standard investment broker, Investopedia notes. Both have their advantages and disadvantages. Check the IRS.gov website for changes and updates.
4. Tax planning
With wealth accumulation comes taxes. Adding this portion to your financial plan can help you understand and save for those tax consequences that naturally come with your larger investments.
5. Retirement planning
When do you hope to retire? What would you like to be doing in retirement? How much money do you want in your retirement account? What are ways you can start setting aside money here? Thinking about these questions can really help you plan properly.
6. Estate planning
Not everyone needs this one right away, but this is here if you want to own property or invest in something.
“Having goals is like laying railroad tracks to where you’re going instead of wandering aimlessly,” Murawski says. “Lofty goals, small ones — have them all. The big thing is to write it down.”
If you’re a numbers-oriented person and need something to work toward, Murawski recommends putting away at least 10 percent of your income toward your goals. He admits it’s a scary number to look at initially, but try to determine what you realistically can do and then stick to it. You can always ramp up in a year or so when you’re on stronger financial footing.
In addition, ask yourself this: What number in my bank account would help me sleep at night?
A huge pitfall of financial planning is starting out strong and then falling off the bandwagon as time goes on. Know that you can always start small on your own and tap into professional help when you’re ready to tackle lofty goals.
You never know what to expect in this crazy thing we called life. A car accident, divorce or other dire event can strike and you’ll need to have cash on hand, especially if you’re out of work.