Financial Planning for Beginners

When you’re starting out on your journey to financial freedom, setting personal finance goals can seem like a daunting task. It’s impossible to know exactly what your retirement will look like or what unexpected events will arise that will affect your financial circumstances and goals. However, having a broad vision of the lifestyle you want to achieve and adjusting your plans along the way makes it 10x easier to work towards your financial goals. Here are some steps you can take to get you started on your personal financial planning:

Assess Your Current Financial Situation

I use my personal finance tracker to check my financial health every pay-period. This allows me to keep my finger on the pulse of my income, expenses, and investments. Knowing where my money is going ensures that I’m spending my money intentionally and keeping myself accountable for hitting my financial goals. Keeping track of my net worth and watching it rise over time gamifies the activity which makes me look forward to it instead of dreading it.

Create a budget that you can realistically stick to, that may mean not cutting out major expenses immediately if you know you’ll be back to your old ways the next month. Instead, once you have a picture of where your money is going, you can start to make slight adjustments to your spending behavior to re-direct your money towards your short and long-term goals.

Define Your Short-term and Long-term Financial Goals

Before you can think about short and long-term financial planning, it’s important to have an emergency fund established. Emergency fund savings should be kept separate from both your long and short-term savings goals because these funds will be your buffer for life’s unexpected events, like vehicle repairs or unexpected medical costs. An emergency fund provides peace of mind that an unexpected event won’t wipe you out financially. That peace of mind is a foundational aspect of financial freedom, so if you don’t already have 3-6 months of necessary expenses saved up, that should be your number one priority (alongside paying off high-interest debt, if you have any).

Short-term goal planning can be done for something as simple as saving up for a car, a home renovation, a vacation, etc. The timeline for short term goal planning is generally between 6 months and 5 years. Saving for these kinds of goals allows you to avoid having to take on debt and pay interest on that debt to achieve your goals. Exercising patience here to purchase what you want in the short-term while balancing longer-term goal financial goals will go a long way towards your financial success.

Long-term financial planning centers around goals that will take longer than 5 years to save for. These can include paying off student loans, paying off a mortgage, or saving for retirement. Because of the long-term nature of these goals, it’s important to revisit your progress towards them periodically to make sure you’re on the right track. Remember not to let short-term goals overshadow your long-term goals. When it comes to saving for a new car vs. saving for retirement or a house, always prioritize the longer-term, more impactful goal.

Lastly, remember that you don’t need a specific reason to save money. Here’s a quote from Morgan Housel’s “The Psychology of Money” that drives this point home: “Only saving for a specific goal makes sense in a predictable world. But ours isn’t. Saving is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment.”

Implement Strategies to Save and Invest Wisely

With 51% of Americans earning over $100k saying they live paycheck-to-paycheck, the answer to wealth-building isn’t always earning more money, rather spending the money we make more wisely. While I don’t want to minimize the impact of inflation and corporate greed on the current state of the American economy, there are actions each of us can take to steady or own financial ships amidst this turbulent economic ocean.

For example, Automatic savings and investing account transfers from your checking account to your saving and investing accounts can prevent you from ‘feeling rich’ when you see a big number in your checking account after pay-day. Systems like this help to remove the temptation to avoid saving and are essential to prevent short-term greed from steering you off course from your long-term financial goals.

A big part of the financial industry is predicated on making investing seem risky, complicated, or out of reach for the common man. However, investing for most people can be as simple as putting 5-10% of your monthly income into an S&P500 index fund in a retirement account and letting it grow over time.

Take for example the story of Ronald J. Reed (paraphrasing from The Psychology of Money): Reed was humble mechanic at a gas station for 25 years and then swept floors at J.C. Penney for another 17 years. However, when Ronald died in 2014 at age 92, he was one of the fewer than 4,000 Americans who had over $8M in net worth. Those who knew Ronald were baffled at how he amassed such wealth, but there was no secret lottery win or inheritance. Ronald simply invested what little he could into blue-chip stocks and let his gains compound over decades.

Monitor your Progress and Adjust the Sails

An important part of financial planning is incorporating it into your monthly routine. If you’re not someone who has much experience with financial planning, building good financial habits and sticking to them is more than half the battle. Monitoring your progress will allow you to see how your behaviors directly influence your financial success. If you have a partner or close friend that can help you on your journey, this will make taking the actions above even easier.

Equally as important as holding yourself accountable to your financial goals is to give yourself some grace when you miss a financial goal, or something happens in your life that delays a milestone you had previously planned. “Man makes plans, God laughs” Don’t beat yourself up about it. Dust yourself off and keep making the small daily choices that will put you on a path to success.