One of my favorite life mottos is “If you fail to plan, you plan to fail.” This rings true in so many areas of our lives, but especially in regards to our personal finances. Regardless of your age, income, or any other societal “qualifier” we’ve created: you need a financial plan.
A financial plan is your overall strategy for monetary success. A strong plan includes your spending plan, your income and expenses, how quickly you’re paying down debt, your investments and retirement, and ideally a way to track your net worth over time. Sounds like a lot, right?
To simplify, I want you to think of your financial plan as a 2 part system: your short-term strategy, and your long-term strategy. Both are integral and require attention, and if done properly, they will work seamlessly together to help you reach the financial freedom you are looking for.
Your short-term financial strategy is centered around how you manage your money on a daily basis. This includes your spending plan, tracking your income and expenses, and saving money. A short-term strategy also includes shorter-term goals, which could include building an emergency fund, saving for a wedding or a house or a car, and/or paying off debt. My favorite spending plan tool is The Personal Finance Dashboard, which gives me a full 360 degree picture of every facet of my finances.
Your Spending Plan
This is where you create your budget. A healthy and effective budget follows a specific process to be successful. The first phase is identifying your necessary expenses, which include your housing costs, utilities, food, transportation, and medical needs. Once you have established a solid understanding and awareness of how much money goes to these costs each month, you can then move on to your discretionary budget.
Your discretionary budget includes money that can (and should) go to both your short- and long-term savings goals. I want you to focus here first; before you move on to your discretionary spending. This is the concept of paying yourself first, which involves allocating money towards your savings before you start spending it on the “fun” stuff. How much money do you need to reach your goals? After you’ve established this, then comes the fun part!
The Secret Sauce
Allocating money to discretionary spending is one of the most controversial topics out there. In my personal opinion and experience, I live by the motto “Live less in the areas that don’t matter to you so you can live more in the areas that do.” Following this method allows me to align my spending with my priorities, and ultimately I am only spending money on the things that are really important to me, rather than the things that aren’t. For me, this means prioritizing experiences with friends and family, rather than on material items. This is different for everyone, so spend some time learning about yourself and what you need to be happy. I have a course specifically designed for this process called The Financial Audit Toolkit, which you can purchase HERE.
A long-term financial strategy is focused on growth and appreciation of wealth. It can be incredibly challenging to predict the future, so taking steps today that will help your money grow over time so you have more later, is super important. Growing wealth can happen in a variety of ways, but one of the most common ways to make your money grow is to invest it.
I have so many articles about investing which I will like here, here, here, here, here, and here (just to start!). I like to break down my long-term financial strategy into 2 parts: my retirement account, and my brokerage accounts.
In terms of retirement, your situation may differ to mine based on your current employment status. I have a 401k with my employer, as well as an Individual Retirement Account (IRA) that I’ve opened on my own. Based on your employment status, you can open either a 401k if you are employed by a company, or an IRA if you aren’t. This is an incredibly important account to have, even though retirement feels so far away. Why? Because of compound interest, which I explain here.
If we’re looking at investing in general for the long-term, which is different than having a retirement account, you need to open a brokerage account. A brokerage account is an investment account, and you need one if you want to start investing in stocks. When it comes to investing, there are so many different opinions and strategies, but the strategy that I personally follow is a long-term dollar-cost-averaging strategy. This means that I am focused on long-term appreciated of my investments, and I invest on a set cadence, no matter what the current economic environment looks like.
At the end of the day, a healthy long-term personal finance strategy generally contains some sort of investment portfolio, whether it be through a retirement account, a brokerage account, or both.
Successful financial planning involves incorporating both a short- and long- term strategy. These two approaches should go hand-in-hand, and aspects of your short-term strategy are predecessors to the outcome of your long-term strategy. If you don’t know where to start, I recommend setting some short- and long-term financial goals first. These will give you direction on what needs to happen in order to get from where you are now, to where you want to be. Want some more guidance on how to approach your financial strategy? Book a consult with me!