Before continuing, you should remember: A personal financial plan is just that, personal. Each person’s circumstance is different and will require a different (sometimes radically different) solution. You should consider if your circumstances require more expert advice i.e. do you need an advisor.
This does not mean you need to have an ongoing relationship with an advisor, but having someone, in person, reviewing your financial situation and providing objective advice is usually worth paying for. A plan is not static, done once, and filed away. It needs to be massaged when circumstances change e.g. marriage, children, changes in income levels, nearing or reaching retirement. The purpose of the plan is to help you focus on where you want/need to be.
What’s the “Right” Way?
In its complete form, a plan is a fairly complicated piece of work. The process usually involves:
- Setting lifestyle goals (where do you want to live, what are you future employment dreams, when do you want to retire, how much income would you need, etc.). The list could be as detailed as you want. The objective is to determine the financial impact of your choices.
- Determine your current financial state
- Set a target budget
- Create longer-term projections
- Determine an investment strategy
- Work the plan
- Revisit periodically and adjust
This is the basic layout. But we think there are several practical challengers for the do-it-yourself planner (i.e. most of us):
- Too many projections. Not to mention, how on earth do you do it?
- The plan will be affected by many life decisions e.g. getting married or having children
- Creating an investment strategy only matters when you have a pool of money to invest
- There are major differences in approaches depending on how many years you have to retirement. The financial choices for a 25-year old and completely different from a 50-year old
The approach also has the whiff of needing a full time planner. Therefore, we think the challenges could be enough to deter nearly everyone.
Our Suggested Approach
Our alternative approach tries to be more practical, so you should be able to find it manageable. You’ll notice the sections in this website are built around these ideas, so there is lot of information for you to access.
- Understand in detail your current ability to save and maximize with a proper budget. Check out our Budgeting Series.
- Make your budget closer than your best friend.
- Build an Emergency Fund.
- Find ways to Reduce Your Expenses.
- Get your debt under control and come up with a plan to reduce and eventually eliminate it. We explore this in Manage Your Debt.
- Adjust your budget with every major life event or decision, planned (e.g. identified goals such was wanting to buy a home or travel) or unplanned (e.g. marriage – nobody realistically plans for the financial impact of this in advance – there are just too many variables). Check out the section Life Events and Decisions.
- With your budget and debt reduction/elimination plan in place, then develop some simple projections of your future retirement situation and assess the adequacy. In our view, serious attention to this is really only possible when you are 40-45 years old. YES, this will vary by person and preference.
- Forget about serious investing until you have a pool of surplus cash. You must be able to live comfortably without needing to dip into this pool except in the case of a major financial crisis. And this must be a serious destabilizing financial shock. This is NOT the same as your Emergency Fund, which we explore next in Build an Emergency Fund.
There is a lot of advice available on ways to approach getting your financial house in order. Over time, we’ve read several and cherry picked which advice worked for us. Here is a popular book from Amazon to get you started.
Thoughts or experiences to share? Or do you have a question? We’ll love to hear from you in the comments below!