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The Financial Planning Process – Steps to Wealth

How to Manage Money Wisely – The Personal Financial Planning Process

Everyone wants to improve their financial situation, but many people are stuck in the same habits that prevent them from thriving financially. Unfortunately, it’s hard to improve when the same old financial advice is repeated ad nauseum: budget, budget, budget! “What does that look like in my life?” you might wonder. “And aren’t there any other ways to improve my financial life?”

You might wonder, “How to manage your money when you don’t have any?”

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The secret to overcoming the habits that are keeping you poor is increasing your financial literacy and embrcing the financial planning process.

1. Become Financially Literate

What is Financial Literacy?

Financial Literacy is a combination of financial knowledge and being able to act on that knowledge to keep your financial life healthy.

For instance, you might have heard of budgeting. Being financially literate regarding budgeting includes not only understanding what budgeting is and the ways to create a healthy budget, but also actively applying a budget to your own financial life.

As another example, consider debt. Most people know that too much debt is bad. Financially literate people know two additional things:

  • How to strategically pay down debt using a method like the Debt Snowball.
  • That debt can serve a purpose if used intentionally and carefully, like with a home mortgage.

Those who have higher financial literacy can act on this knowledge to positively affect their financial lives.

Before beginning the personal financial planning process, here’s how to learn about finance and money 101:

  • A good place to start is with our free investing resources.
  • Reading can help improve your financial literacy. From personal finance blogs like CNN.Money and Kiplinger to books like Paul Merrim and Richard Buck’s new book, We’re Talking Millions! How to Supercharge Your Retirement. There is no shortage of ways to learn how to take care of every aspect of your finances.
  • If reading isn’t your thing, podcasts are also a great way to learn about financial topics, ranging from everyday personal finance advice like how to set up a budget all the way to niche advice on investing in real estate.

The next step in the financial planning process is to be honest with yourself and understand your entire financial picture.

2. Understand Your Current Financial Situation

This step may be hard, especially if you have a lot of debt. But it’s crucial to grasp where you are, financially, before you begin to learn how to manage money wisely.

The simplest way to view your current financial picture is by calculating your net worth.

Although it might sound difficult, you can jot down your net worth on paper, use a spreadsheet, or upload your assets to an online platform like Mint, Personal Capital, or Quicken.

You’ll end up with a clear picture of:

  • What you own – like bank accounts, retirement accounts, investment accounts, and any real property like a house.
  • What you owe – like unpaid credit card balances, loans, and student loan debt.

If the final number is positive, that’s great.

If it’s negative and you owe more than you own, you can begin to pay off debt and build assets. Fortunately, your net worth is easily improved with smart financial planning and learning how to manage money wisely.

Now you’re ready to set your financial goals.

3. Set Financial Goals

As your financial literacy and awareness improves, you may find yourself overwhelmed by all the things you want to do for your financial life. Maybe you realize your family needs to stick to a stricter budget, but you also want to roll over your 401(k) from your prior job, refinance your mortgage to lower your monthly payment, start a college fund for your children, and begin to pay more than the minimum on your debts.

All of these goals are great, but trying to tackle them all at once will likely lead to burnout.

Instead of trying to do everything at once, prioritize your financial goals. Then, try one new thing at a time.

Here are sample financial goals to get you started:

  • Track your income and expenses, either by hand or with an app like Clarity Money
  • Negotiate lower bills on your own, or with an app like Bill Shark.
  • Set up a debt repayment plan.
  • Sign up for your 401k workplace retirement account and choose the best funds or let Blooom help you.
  • Make more money and set up a side-hustle.
  • Start to invest, either on your own or with a robo-advisor like SoFi.

Write down all your financial goals. Then prioritize them in order of importance.

4. Create a Financial Plan

You need to manage your money, when you don’t have any, or when you have a lot. In fact, not having any money makes it even more important to create a financial plan and learn how to manage money wisely.

If you prefer to get some help, and speak with a professional, there are low fee financial planning options. In fact, some digital investment managers, or robo-advisors also offer human financial planners for low fees.

Many big brokerage firms, offer not only cash management, but knowledgeable financial advisors to help with basic money questions and guidance.

The next component of a smart financial plan includes prioritizing the activities that will propel you to reach your goals.

Set lifestyle and financial goals. If you’re overspending and not saving and investing enough, then trimming expenses and increasing savings is important.

But, your strategies need to be targeted and specific.

Review your financial planning goals from Step 3 and include them in priority order, in your financial plan. But here, it’s not enough to list the goals, you need to break them down into action steps.

For example:

Cut back on spending is too vague. But, buy a lower cost car, is specific. When cutting back spending, it’s helpful to focus on the biggest ticket items like housing and transportation.

Start investing is vague. Open an account at Betterment and set up automatic transfers into the account, is specific. Betterment offers banking and investing, and financial advisors.

Do you need motivation to implement the financial planning process?

Here’s why it’s important to start saving and investing now:

Understand the Miracle of Compounding

Compound interest is a boon to the savvy saver. Compound interest is when the interest on your savings account gains interest itself. For example, lets say you were gifted $1,000 from a generous family member.

If you left your $1,000 under your mattress, you would have $1,000 at the end of the year.

If you put your $1,000 in an account with compound interest, however, your money would grow bit by bit. Let’s assume that you earned 0.25% interest monthly. Your account would look something like this:

  • Month one: $1,000 + $2.50 interest = $1,002.50
  • Month two: $,1002.50 + $2.51 interest = $1,005.01
  • Month three: $1,005.01 + $251 interest = $1,007.52

While this seems like slow growth, you will have earned $30.42 by the end of your first year. If you left this $1,000 in your account and never added more to it, you would have $1,820.75 after 20 years.

Now, imagine how this amount changes if you add more money to your account. If you added only $100 to your account each month for 20 years, you would have $34,733.03.

Or if you invested that money in the stock market, for your future and earned 7% per year, your initial $1,000 would be worth $2,760 in 15 years, without adding an additional cent.

Your financial plan will include your goals along with the specific steps to achieve them.

You might be surprised at the power of writing out a plan.

It’s easier to monitor and implement your financial dreams, if you look at them, review them, and put them into practice.

5. Strategy to Implement Your Financial Plan

Whether you’re beginning the financial planning process with a lot or a small amount of money, the steps to implement it are similar.

If you need to cut back and save or invest more, there’s an easy way to manage money wisely. And I’ve been doing this for decades.

Use Automated Saving and Investing

Arguably, saving and investing can be hard to do. After all, there are so many things that require our money! Saving for retirement can frequently get placed on the back burner, particularly when we’re young.

Automated saving is making an arrangement with your employer or bank to automatically transfer your money into a saving or investing account-like SoFi Active Investing. This makes saving and investing that much easier: you’re paying yourself first, you don’t need any extra brainpower to remember to do it!

The savviest savers and investors typically automate saving and investing into several accounts:

  • A bank or cash account for emergency and short term savings like the Wealthfront Cash Account. This is a combined high yield checking and savings account. You can also access a low-fee digital investment manager at Wealthfront too.
  • A workplace retirement account like a 401(k) or IRA.
  • A taxable investment account for long term wealth building. We like M1 Finance (which also has a high yield cash account) because it offers pre-made investment portfolios and do-it-yourself stock and ETF investing.

Automated saving can be set up by tweaking your direct deposit so that a certain percentage of your weekly paycheck goes into a savings account, investment account or both.

Automating your saving and investing not only ensures you’ll have cash for emergencies and your future, it’s a no-budget way to make sure that you’re not overspending.

Since you’re saving and investing are taken care of, you can spend what’s left of your income.

6. Financial Planning Details

With your personal financial planning process, you have a grasp of how to reach your financial goals. You’ll be more aware of how you’re saving, spending and investing.

Here are several tips to manage your money wisely:

Drive an Affordable Car

One of the most disturbing facts you’ll learn on your quest for financial literacy is just how much money we spend on our vehicles every month. Between gas, insurance, car payments, taxes, and maintenance, cars are a huge portion of most budgets. In fact, a 2018 study by the American Automobile Association determined that the average American pays nearly $8,900 annually on vehicle expenses.

What could you do with an extra $8,900 per year?

Financially literate individuals know how to mitigate these expenses by purchasing cars outright, shopping for cheaper insurance rates, or even forgoing personal cars all together in favor of bikes or public transportation.

Saving and Investing

As your savings grow, you may want to learn more about investing and historical stock and bond market returns.

By understanding the stock market, you’ll be able to make careful but deliberate choices about how much money to keep “liquid” – that is, readily available for withdrawal in your savings account – and how much should be working for you in an investment portfolio.

You’ll be able to understand your risk tolerance and invest on your own.

Part of this process is to figure out how much you’ll need for retirement. Check out Kipinger’s online retirement calculator.

You might even prefer to get help with investing by using a low-fee robo advisor. The best robo-advisors can help you make good investment decisions. The key difference between traditional financial planners and robo advisors is that robo-advisors rely on computer-generated algorithms to make calculated decisions about your investments. But today, many robo-advisors also offer human financial planners, cash management, and a host of other services.

Making Smart Housing Decisions

Don’t buy more house than you need or can afford.

Consider buying a duplex and renting out half, for an income stream.

When your family outgrows the other side, you might rent out your half, thus doubling your rental income. You might then choose to purchase additional rental properties, or use your existing property to help you pay for your mortgage on the mini mansion – if, that is, you still want it!

Ultimately, when you choose to pay attention to your income, expenses, and net worth, you’ve taken the most important first step in financial planning.

The next step is the longest, and actually continues throughout your life.

7. Monitor Your Financial Plan

Over your life, you’ll continue to build wise financial habits along with greater financial literacy and wealth.

Despite your best efforts. we all know that the unexpected happens.

That’s why it’s important to monitor your financial plan yearly. Assess whether you’re meeting your financial goals and whether you need to adjust them.

A financial plan is like your money roadmap. Keeping track of your spending, saving, and investing to make sure they will get you to your goals, is all part of the financial planning process.

How the Financial Planning Process can Lead to Wealth

When you become more literate about financial topics, you can directly influence your financial life for the better. There are a myriad of ways increased knowledge can help you grow your finances and become rich.

The keys to building wealth with the financial planning process are to make a plan, implement the plan, and modify the plan as needed.

Financial literacy affects every facet of your life, from the amount you spend on groceries to the type of house you live in.

With improved financial knowledge, you can start making good choices that directly benefit your future: choosing smart investments, paying yourself first, and budgeting your money so that every penny works for you.

The good news is that financial literacy and success are not hard to gain.

Take the first step in financial plannint and choose a topic. Read or listen to podcasts on that topic; then, apply what you learned to your financial life. Even small moves, like figuring out where your retirement accounts are held, have a ripple effect on your finances.

The hardest part is getting started!

Disclosure: Please note that this article may contain affiliate links which means that – at zero cost to you – I might earn a commission if you sign up or buy through the affiliate link. That said, I never recommend anything I don’t personally believe is valuable.