A while back, I casually dropped my business card into one of those restaurant fishbowls by the entrance, the kind where you stand a chance to win a complimentary dinner for nine. Fresh out of college, in my first job with a thousand business cards to flaunt, why wouldn’t I take a chance?
However, this “free” meal wasn’t without its hidden costs. I found myself trapped for over an hour with a supposed “financial planner,” whose tactics were more salesman than advisor. Throughout that hour, I deflected pitches on life insurance and exorbitantly priced mutual funds. Even then, I could spot the downside of such high fees and commissions.
Once our chat ended, I left with gratitude for the food, the hard sell, and a valuable lesson that nothing is truly free. But, this encounter had its silver lining – it made me aware of my lack of a financial strategy. At that time, with no spouse or children, the absence of a plan wasn’t alarming. However, fast-forward through a marriage and two children, a solid financial plan becomes paramount.
But remember, a “financial planner” isn’t mandatory to devise your own plan. You possess all the necessary resources; you just need to assemble them properly. I’m here to guide you.
Do note, I’m not a certified financial planner. I’ll share my personal journey towards financial planning. It wasn’t until much later that we collaborated with a fee-only financial planner, which further deepened my insights. But always remember, the efficacy of a plan is in its execution.
Understanding a Financial Plan:
In essence, a financial plan:
- Reflects your present financial situation.
- Outlines your envisioned future financially.
- Crafts a route to navigate from present to future.
At the time of my unintentional meeting with the financial advisor, my life revolved around dating my future wife, sharing an apartment with a buddy, and having no kids. I had aspirations of marrying my girlfriend within five years, and a decade down the line, starting a family and owning a house.
Realities might not always align with plans, but it’s vital to chalk something out. We always had a rough outline.
Let’s break down this process into three steps:
1. Detailing Your Current Financial Status:
If you’ve perused my previous writings on monitoring my net worth, you’d understand this step. It’s essentially a tally of your assets and liabilities.
I routinely update my figures monthly, ensuring no financial detail escapes my attention. Your net worth serves as a time-bound financial snapshot. But, to get a complete picture, factor in your income (from both employment and investments) and expenditure.
Your net worth is a vessel being constantly filled with earnings and drained by expenses.
It’s relatively straightforward to gauge your income, especially with a regular job. But if you’re an entrepreneur or juggling side gigs, it gets intricate.
Further, tools like Mint, You Need a Budget, or Personal Capital are excellent for tracking your expenses. By reconciling your income and outflow, you can oversee how your net worth fluctuates and strategize accordingly.
2. Forecasting Your Future Financial Status:
Forecasting can be tricky, as humans aren’t adept at future predictions.
However, deliberating with a financial advisor can provide clarity. It’s akin to financial therapy. Voicing out your concerns and plans can be enlightening. If you opt to tread this path solo, it might be wise to later consult someone trustworthy.
Think of multiple future scenarios instead of just one. Segment your life into 5 or 10-year periods, defining goals for each. For instance, my target was homeownership between ages 25 and 30. While a five-year window might seem broad, it offers adaptability. As I neared that phase, I could narrow down specifics.
Pen down your ambitions, associate them with a timeframe, and then determine the financial prerequisites.
3. Strategizing From Present to Future:
Shelve your fortune-telling cap and whip out your calculator. Now, it’s about crunching numbers.
Using the house example – how soon can I save up for a down payment? By solving such queries, you gauge the viability of your dreams. Retirement, being a long-term objective, demands more intricate calculations. Several online tools can assist here.
Once you’ve structured your plan, it’s beneficial to consult a professional for fine-tuning. There are numerous advisors available, but always opt for fee-only ones.
Lastly, revisit your plan annually. It’s pivotal to ensure you’re on track and make necessary modifications.
Life will always throw curveballs, both delightful and challenging. Your plan acts as your compass during these times.
A structured plan prompts you to contemplate the future, quantify it, and make reasoned decisions. Without one, you’re merely shooting in the dark, and that rarely spells success.
