Simple Financial Planning For Beginners

from: The Young Professional's Guide to Success (vol III)

"A Just Get to the Point Newsletter" by CVW Financial

A common question that I get from those who are starting to see real money coming in, but aren't sure whether they are ready to commit to a full financial plan:

"In general, what should I be doing with my money right now?"

So here are some ideas to think about.

1. Knowledge is Power

I actually do not think everyone needs a budget. If you are paying your bills- and especially if you are paying them and have some left over- then you probably do not need a budget. Also, if you are someone who will try to follow it, fail, then overreact with anger and a spending binge, then you may not be a great candidate for a budget (especially one that you create and implement for yourself).

But understanding your budget and where your money is going is important. Noticing what you spend your money on will help you make truly informed decisions. It is not uncommon for me to work with someone who thinks they don't spend much, but through looking over bank statements, Amazon purchase pages, etc. they realize that they spend constantly and on things they do not actually care about. 

I often recommend writing everything down for a few months, from electric bills to a pack of gum. Then you will have a purely objective record of where your money is going.

Remember: Knowledge is power! You will have more control over your finances (and life) when you are fully aware.

2. Plan for Emergencies

(As the years tick by, one thing is abundantly clear: life is so unbelievably unpredictable.)

So, once you know where your money is going, you need to know how much you need to get by each month. The reality is, you just never know what life will bring tomorrow, next month, next year. Having money in a savings account (high yield, meaning one that pays 4-5% interest, is often available lately) funded with what you need for 3-6 months is important.

Here's the catch, though. Everyone is in a different situation. For example, if you live rent-free, you may not need so much; if you have another earner in your household, you may need only 3 months; if you are the supporter of others, you may need 6 months or more. 

You do not, however, need to save this amount all at once. It should be a goal that you try to achieve over time. Set the time you are comfortable with, come up with the total, then do some division. You can make this one of your non-negotiable monthly bills.

3. Set Goals

There are many things you may need to set goals for and they can take very different forms. There is the emergency savings fund (mentioned above). There may be a house that you'd like to save for, or a rental property, or a wedding, or a car. And always: retirement!

Here are some very general benchmarks that you can think about as a way of guiding you toward retirement:

• 10-13% of income every year until you turn 65. 

  • By the age of 25, you want around 20% of your income saved (if you earn $100,000 that is $20,000)

  • By 30, you want between 60% and 80% saved (if you earn $100,000, that would be $60,000-$80,000)

  • By 35, you want greater than 1.5 x your income (for $100,000, that would be $160,000-$180,000)

  • By 45: 3-4 x your income ($300,000-$400,000)

  • 55: 8-10 x income ($800,000-$1,000,000)

  • Then at 65: 16-20 x income ($1,600,000- $2,000,000)

I need to repeat: this is VERY general and relies on your earning exactly $100,000 starting at age 25 and staying at exactly $100,000 until you turn 65. Not particularly realistic.

In my experience, there is a tremendous variation in what people have saved and in what they actually need. Additionally, hitting your targets comes down to making this type of savings a regular bill, preferably as an automatic deduction, so that you never feel like you had the money in the first place. 

4.Make it Automatic

It's amazing, but people tend to adjust very quickly to new circumstances. Think about it: people live in war zones and somehow go about their lives. So if you are used to seeing a $2,000 paycheck and you automatically deduct $260 (that's 13%) from it, you will adjust to a $1,740 paycheck very quickly. 

Conclusion:

Understand where your money is going, make savings goals, then automatically set aside that amount (or those amounts, if you have multiple goals). Those are the basic principles.

BUT, you do not have to be perfect with this. And you do have to enjoy your life! Ultimately, if you are on top of things and saving regularly, there will be both a sense of satisfaction AND a fairly quick adjustment that will allow you to live without the financial stress that so so soooo many live with.

The point of all this is to live well!

To learn more, check out my homepage or head over to the FAQ section.

CVW Financial, LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past

performance is not indicative of future performance.