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Financial Planning : It’s About More Than Money – 5 Crucial steps to get you started

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Financial security is possibly one of the most overlooked elements in today’s day and age simply due to the mere misconception that it is impossible to obtain. Financial Planning is the first step towards the security you are looking for.

I work within the financial services industry in the heart of River Oaks and to everyone’s surprise, the overwhelming dilemma of financial insecurity is ever apparent. In fact, I have been noticing the constant cycle of debt that individuals face on a daily basis more so now than before.

I’ve begun to notice from my coworkers as well, that there seems to be such a significant amount of financial adversity that they face on a daily basis – despite their well-paying jobs. And, every time we all get together for lunches or breaks during the day – our main topic of conversation is how money lacks and expenses add up quickly.

Now, I came from a background of finance. My main hobbies were financial planning for all of my friends – putting together spreadsheets and figuring out neat tricks to help them maximize the use of their money given the minimal means. Some of my favorite classes were financial planning and actually getting portfolios of clients and helping them allocate their assets and fine-tune their budgets.

So, it’s no surprise that when co-workers share their struggles with me, I have the sudden urge to help them get their expenses on track so it doesn’t feel like it is taking over their lives. And, funny enough, I have no special “patent – worthy” formula – it’s simply making what you have work for you.

I will make this caveat – It won’t be easy. But, I can say, with confidence, that 6 months down the line – you’ll be thanking me. However, do keep in mind – these are just the beginning tools to get you started.

Rule #1: Pay Yourself First

Allocate a certain percentage of your paycheck to automatically be deducted and put into your Savings account each month. Yes, that’s right – I said Savings Account. If you don’t know what I’m talking about, stop what you’re doing and get yourself to the nearest bank and set one up for yourself. This is NOT your checking account. This is NOT the extra cash you keep under your bed or drawer. This is NOT the couple dollars in change you received from a purchase today. This IS money specifically put away for emergency purposes.

I tend to set aside approximately 50% of my paycheck towards this account but I’ve teetered with the amount over the years. Sometimes 30% or 50% – it just depends on what works for you in the phase of life you are in. Some folks may have more expenses than others and you may not be able to put away that much in one go. So, start off small. Maybe 10% or even 20%. The main idea is – you need to put a portion of your money away in order to build a foundation and discipline spending for yourself.

Once you’ve set aside this percentage of your paycheck to your savings, then you may allocate the remaining for bills, necessary expenses, and recreational items. If you need an idea of how much you should put away, make a spreadsheet of all your expenses and how much you make each month – you’ll be able to play around with the numbers to find something you’re most comfortable with.

The reason this step is one of the most important steps is because you need to put away funds for a rainy day. If you ever lose your job – you’ll have something to back you up. Or if you have some unexpected expenses – you don’t need to rely on credit cards with an 18% interest rate attached. This will always provide you with financial independence.

Rule #2: Know where you stand – Track your net worth

I’ll refrain from getting too technical here but essentially, your net worth is “how much you’re financially worth in a positive or negative manner”. If you think about it from a financial perspective, it is your asset to debt ratio. If your assets are greater than your debt, you have a positive net worth and this is where you want to be. However, on the other hand, if the opposite is true and you have more debt, you will have a negative net worth.

Now, you’re probably wondering why I’m ranting about this. But, you’ll come to understand that your net worth essentially impacts virtually everything you to. For example – financing a vehicle, getting an apartment, filing for a loan for school or getting a mortgage.

Therefore, you want to do your best to have control of your financial situation and keep yourself with a positive net worth. Always keep an eye on it so you can keep track of your financial goals.

Rule 3: Set a budget.  

A spending plan is the best way to take over debt and go where you want to go. Here’s what I do in order to follow my spending plan:

  1. Set a budget a couple of days before the month end for the coming month. For example – set a reminder on the 28th to create your budget for the coming month. A sample template can look like
  2. This is where you list out your income, fixed expenses and payment to yourself.
    1. Remember: Fixed expenses include items such as rent or car payment, cell phone bill, insurance, etc.
  3. Next, list a forecast for your variable expenses. Variable expenses include items such as credit card payments, groceries, recreational spending, etc.
  4. Play around with the numbers to see what you’re working with to see where the majority of your funds are going. Sometimes – visualizing can make a huge difference in what you’re doing so you can make changes for the future.

Always remember, your biggest wealth-building tool is your income, and the best way to harness the power of your income is the monthly budget. One side note is that your budget will change month to month. Each month, there are new holidays, birthdays, tax refunds etc. So, it’s always best to be cognizant of that but being prepared is 90% of the battle and certainly pays off in the long run.

 

Rule 4: Don’t get bit by the credit card bug

This is one of the easiest ways to build debt. In fact, it is the sure – fire way to ruin your life. Save yourself and follow my rule of thumb and build your credit the smarter way. Firstly, get a store-specific credit card. Think about it this way – if you can spend it at any store – you’re in trouble.

The benefit of this is:

Rule 5: Retirement

Quite frankly, this is one of the most ignored topics in our generation. Retirement is so critical especially when first starting off. Whether you’re in University or are starting your career – it’s important to be mindful of your future.

I’ll put this into perspective, think about it – you work your entire life and by 65 and you eventually retire. At that point – work stops, income stops but expenses do not. What do you do? What do you live of off?

Most people live under the assumption that social security is enough. However, it isn’t. Therefore, looking into 401(K) plans through your work would help ensure financial security. Many employers even match a portion of your savings so it’s like passing up free money if you don’t participate. When you contribute a percentage of your pay to a 401(k) plan, you immediately start paying less to Uncle Sam. That’s because your contribution comes out of your paycheck before income taxes are deducted. That means your taxable income is less, which in turn lowers your tax bill.

The longer you do this for, the more funds you’ll have by the time you’re ready to retire. I say you start as soon as possible so you can retire at whatever age you deem fit and can travel the world without worry.

Granted, there are multitudes of ways to “save money” and invest your funds. But, I wanted to make sure I shared some simple tips that you can begin implementing on a regular basis and make it as easy as possible for you to reach your financial goals.

Hope you take these tips into consideration for a financially stable future!

 



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