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Where do I Start with Financial Planning?

Published November 18, 2016

More than anything, getting started with financial planning is about simply diving in! Below are some tips that may help:

Let the Nerves Go: Even if you wind up paying for a credit score that you could have gotten for free or you don’t get the absolute lowest rate on your credit card, chances are, ninety nine percent of the time, you’re still leaving yourself better off than if you had done nothing.

Ideally yes, you want to make the best choice to maximize your savings and returns, but if that search for an often-elusive “best” is causing crippling anxiety that leads to inaction, it’s not worth it. The best deal is time and that's something you can’t buy back or renegotiate.

Start with What You Have: Before you can make a plan for how to move forward you have to know where you stand. Not some idea of where you stand, but exactly what numbers you’re working with and how they add up. The best way to do this is to take financial inventory- credit score, debt load, account balances, assets, net worth, etc. Consider there are also free tracking softwares that can give a clear visual of where you stand financially at any given moment.

Define Where You Want to Go: Think of your finances as an actual map. After you identify the “you are here” mark, you need to choose where you want to go. Marking these points makes it easier to decide on the best route between the two, and the same goes for finances: Make a list of your goals, the relative timeline and cost for each, and then prioritize from top to bottom.

Drawing the Route: If your origin is your current financial inventory and your destination is your list of goals, your budget is your route map. Before you can take the next step on that route though, you need to draw it out – that’s where budgeting comes in.

Build a budget that works for you- a zero sum budget, a percentage budget, a cash only budget- the only requirement is that you remain above the make or break number- make or break being your essential cost of living plus savings. Committing to reducing spending and/or increasing income until you hit and surpass the make or break number is the only way to start making progress.

Choosing the Next Step: Beginner Financial Planning: Once you’ve taken your inventory and defined your make or break number you should have a pretty clear idea of how much money you have left over to tackle your list of prioritized goals, the hardest part may be knowing where to begin. Do I pay off my debt? Do I contribute to a retirement account? Do I pad my emergency fund? Do I save up for a down payment? There are so many goals and seemingly never enough money to fund them all. This is where that paralyzing anxiety may start kicking in. Just remember: Whatever you choose will (more often than not) leave you better off than you were before.

Categorizing Financial Goals:

Financial goals generally fall into one of four categories… Debt payoff
Emergency savings
Short/Medium-term savings
Long-term/Retirement savings

Ideally, you can fund all of your goal categories in addition to covering your monthly expenses, by designating larger percentages of income to the goals you’re pursuing most aggressively. Still, reality isn’t always ideal and income restrictions necessitate the prioritization of some financial goals over others. It may be best to start with emergency savings and debt payoff. Building a buffer of at least $1,000 is a great first step (though eventually your emergency savings should add up to around 6 months worth of living expenses). Once you’ve got that 1k buffer, start dividing your money between emergency savings contributions and debt payoff. If you can sneak even the tiniest bit of retirement savings into the equation- maybe even as little as $50 per month- that would be ideal, especially if your debt is low interest.

Now don’t forget about those short and medium-term fund savings either. If you’re a young professional, you have a lot of life to live between now and retirement age– whatever your “American Dream” consist of- home, family, travel, etc.- will need some funding that’s not tied up in retirement or set aside for emergencies only.

If you find yourself stretched thin in an attempt to fund all savings categories, perhaps consider ways of increasing your income. There are only so many ways you can save money and cut back on your day-to-day expenses.

The preceding information is repurposed from Stefanie O'Connell

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