This article is part seven in the article series Financial Planning 101.
You need a financial plan. Life is uncertain. No one is completely secure financially and, let’s face it, most people are completely unprepared for retirement. Financial planning is simply a necessary part of life.
So how do you write one? Below is a quick step-by-step guide to writing your own financial plan. Of course, it’s not a complete financial plan. You’ll have to customize your own. But below are the major issues your plan will need to tackle.
Establish Your Goals
The first step is to figure out exactly what you want in life. Think about the kind of life you want to live. Think about the location, the size of the home, the education — think of everything remotely related to finance. Don’t be afraid to dream — you only live once.
It’s important to get your thoughts onto paper. Get a pen and paper, or open up a word document on your computer. Start writing details of how you want the future to look like. Once you have your idealistic goals written down, remember to factor into account the “boring” goals — a well-stocked kitchen, insurance, etc.
Your goals should include:
- Education. Regardless of your age, extra education is always plausible. I’ve taken college courses with people in their teens and individuals in their 70s. What do you want to understand? Is college even necessary to achieve your other goals? That said, remember: you’ll also need to plan your children’s college degree, supposing you agree to pay for it, of course.
- Occupation. What field do you -want- to work in? Do you want a typical 9-5? Do you want to work in the creative economy? Do you want your own business? Do you want to build a passive income? Remember, the purpose of your job is financial happiness.
- Lifestyle. In the same line of thought as your occupation, how do you want to spend your life? Is work your main focus? Are you fine with “simpler living?” Does your life have to be filled with activities and hobbies? What kind of vehicle do you need/want? These all cost money, and must be factored. Discover what your income must be to achieve your basic lifestyle goals. This is the part that takes research, but make sure to do it… it’s essential to know what must be done.
- Residence. Where do you want to live? You most certainly don’t have to stay wherever you are. The beach, the country, the mountains, the city — all of these are possibilities. Once you move there, what size of a home do you want? You’ll have to do the research to figure out how much it costs.
- Retirement. After you calculate the above, you’ll need to factor in retirement. How do you want to live while retired? Will you live with family? Will you move to a retirement community?
- Insurance. One of the few things that are certain in life is that nothing is certain in life. Clever cliches aside, you need to be insured for worst case scenarios. Insurance is an essential part of financial security. Every financial plan must have provisions for insurance.
Chances are, it costs much less to achieve your life goals than you’d think. Even if you plan a lofty life of monthly vacations, the amount of money you’ll actually need to achieve your goals will be relatively short.
Timothy Ferris is an incredibly controversial author. He wrote the book “The Four Hour Workweek.” The book details how one can go about achieving extremely “far fetched” life goals quickly and without spending nearly as much money as one would think.
Ferris wrote a great introductory article here about how how a little goes much further than we thought. Check it out — it can be life changing. Your dreams are probably relatively cheap.
Plan Your Income
Of course, your financial plan isn’t just about your dreams. You’ll have to pay for it all in some manner — this is the part that trips most people up. If you open most financial planning books (even those by the gurus), almost all of them suppose one thing: that you’ll continue down your current path of employment forever.
Though it’s possible to continue the same job forever, it doesn’t usually happen. It’s a fact: people change jobs all the time. Some people even start their own businesses, sell their skill via freelance work, or find other methods of income. Don’t forget to read the free series How to Make Money for more non-traditional views of how to build an income.
The three most popular are:
- Career. You know the rap: go to college, get a job, work hard up the ladder to prosperity. This is almost always a good idea, with a few exceptions. A vast majority of those who need a financial plan need to emphasize their career while planning.
- Business. According to a recent Harris poll, 72% of people are considering a home business. Growing up, my family owned and operated a small business. Business isn’t just for those with fancy MBAs and connections — especially not in this age. Starting your own vending machine business, managing lawn care, making money online with a website… the possibilities are limitless.
- Investing. Investing is one of the most powerful ways to build an income. Rather than focusing on getting new money, investing is simply exponentially growing the money you already have. You can buy gold, purchase real estate, achieve a higher level education, the stock market or others. Regardless if you are a business owner or an employee, you should unleash the power of exponential to make more money to achieve your goals. Even putting your money into an online savings account is better than letting your money sit idly.
Writing Your Financial Plan
In a sense, your financial plan is a budget on steroids. You’ll be budgeting not just your next paycheck, but for your entire life. A financial plan is simply a budget that factors into account goals, new income and time.
Now comes the fun part: figuring out exactly when you’ll do what you want to do. After all, it’s not good enough to just know what you want. That’s just the first step of planning. The actual plan comes in the form of knowing how you’ll get there and when you’ll get there.
There’s no “plug and go” way of writing your financial plan. Every plan looks a little different. Be as creative as you want, as long as you accomplish the following goals somewhere in your plan:
- Establish a timeline. Where do you want to be in five years? Ten? Thirty? Fifty? Establish how you plan your financial life will look like at these points. Factor the below information and criteria into your plan:
- Research necessary costs. Your current “bills” plus 5% inflation per year. Don’t forget to factor in life insurance, health insurance, car insurance, etc.
- Research luxury costs. What you “want” to do. Figure out what kind of money you’ll need to live the lifestyle you want. Cruises, nice cars, nice house, etc. Education can be considered a luxury cost, because it’s a way of getting extra income. If you plan on paying your child’s way through school, you’ll need to factor this in as well.
- Plot income strategy. For most, this simply means factoring in salaries. But don’t forget that your job isn’t your only means of income. Starting a side business, a money making hobby, or even making money online are options for income and extra income.
- Plan Investments. Investing is simply a must to counteract against inflation. You can invest in stocks, mutual funds, bonds, real estate, gold, collections — you get the point. Just make sure you know what you’re doing, and don’t put all of your eggs in one basket. As you age, financial security should become more and more important.
Remember to factor in every cost and possible incomes. Whenever you aren’t sure how the numbers will add up, be a little pessimistic — it’s safer that way. But when it comes to how you will make money, don’t be so pessimistic as to think that you “have to” stick with a job just because it makes the most money.
The Key to a Good Financial Plan
Writing a financial plan isn’t “hard” — but it takes rationality and creativity. You have to be rational enough to assess your current situation, creative enough to see what is possible, and have the integrity to follow through with the plan. Remember, just because it’s on paper doesn’t mean it will happen — you have to decide to follow through and live up to your goals. This is the hardest part, and the one that trips most up.
Writing a financial plan is always about your goals. Always. Unfortunately, so many of us get so caught up in “financial” that we forget the purpose of “planning.” Remember, it’s not about the money — it’s about getting what you want out of life. Money is just the tool.
To learn more about the purpose of writing a financial plan, don’t forget to read the rest of the articles in the series Financial Planning 101.