Financial Planning

If you like to be financially literate, and want to understand and develop a financial plan yourself, here are 10 important “ingredients” that you need to integrate into your financial “cookbook”. There is no wrong time to start, and anytime is always a good time for you to set those goals. But remember to check often, and see if you are on track, or add any new goals or assess previous set goals to make sure they are reachable.

#1 Develop a financial goal and learn to invest your money early:

What is Warren Buffett’s investment strategy? Have you ever wonder about that? He is a believer in the “Value-Based Investing” model. He sets many different goals. You need to bare a solid goal in mind. Both long-term(10 years and beyond) and mid-term(3-5 years) and short-term(1-2 years). You need to write them down and look at them often. There can be huge goals and mini goals, but need to be concrete, associate with a dollar amount, and with a timeline or target date next to each of the goals.

What are the long-term goals look like: In 10 years, will you be in your 20’s, 30’s, 40’s, 50’s, 60’s, 70’s, 80’s or 90’s? What are the most important things to you, or your dreams when you reach that age. Will that be having enough funds for your kids’ college education? Will that be the retirement you have been looking forward to? You need to write them down and label with an age.

What about mid-term goals: In 3-5 years, will you want to purchase that dream home by putting a certain % down? Will you want to buy the 2nd house as a rental so you have steady income? Will you want to go to that dream vacation with your loved ones? Will you want to pay off that debt? How much? When exactly?

Lastly, your immediate or short-term goals: In 1-2 years, will you want to find that jobs you have been thinking about for a while? Will you accomplish that degree you have been working hard towards? Will you start that business you’ve been thinking and talking about for months? Thinking about investing in the stock market, which stock is the best to buy?

#2 Know how much is your net worth:

Undetstand how much is your net worth at this point of time is an important component to fit into your big financial picture. Basically know how much you have now can help you determine how much you want to have in the future short, mid, long term plan. Are you broke now? Are you in a good shape? Are you in small amount of debt?

To calculate your net worth, you add up all the assets you’ve accumulated: House equity, bank savings, stocks, kids college funds, personal valuable items, etc. Then minus your debts or liabilities: your credit card debts, your mortgages, your personal loans, etc. The final amount is your current net worth. To grow, you need to increase assets and decrease liabilities.

#3 Figure out your budget plan and monthly cash flow:

We can’t emphasize the budget plan enough. It’s the meat and potato of your financial plan. Do you have a budget? This should be a first thing you ask yourself when making important financial decisions or even small decisions. Before you go on a vacation, what is your budget? Ready to hit the grocery store or the mall, what is your budget? Budget can help you determine where and how much you are “going to” spend? How can you limit your spending to be under the budget? Sometimes, unexpected spending knocks on your door: A doctor bill that was not expected; a house repair bill; a vet bill, etc. That will be grouped into “emergency funds”, which we will discuss later.

Do a good budgeting plan, list your monthly expenses based on priorities. These are must-have items, those are great-to-have items. Food, utilities, gas (to work), student tuition are must-have’s; Spa, mall shopping, restaurant dine-out are nice to have’s. List them out in a table, using a software or app will help you build a repeatable process each month. If your spending are under budget, give yourself 2 thumbs up, because you are closer to your goal.

#4 Manage your debt:

Debt can be a scary thing to think about, just like you hear people often mention, “Get out of Debt!”; “Debt can break you or get you into big trouble!”; “Pay off your debt is the smartest way for financial freedom!”; “As soon as you turn that car key, it turns into your debt!”. Debt actually can help you, surprise. Especially your credit score, if you pay off the debt quickly and totally. Each of us, unfortunately, have to encounter some kind of debts in our lives: mortgage payment, student loans, the bigger the investment, sometimes the bigger debt we acquire. But that is where financial planning comes in. It helps us to figure out when we can actually pay them off. 30 year mortgage loan, you will get it paid off in 30 years; 5 year ARMs, you will have to pay off in 5 years or find other ways to refinance. Car payment, student loans, they all have terms. Be sure to read your small fine print where the organization put in the years and limitation in the contract!

#5 Emergency Funding Sources:

Think about the rainy days while you are in the sun! Who can predict a layoff that is coming our way? Who can tell a big hospital bill will fly towards our direction? Who can expect your liable car’s transmission suddenly go out of business? These are all unexpected emergencies in life that can break your bank. If you don’t have any extra emergency fund saved up (some say 3-month of current monthly income; some prefer 6-month), you will not be able to pay for these incoming “disasters”. It doesn’t matter which plan, you just need to have a plan. Calculate your current monthly pay, times 3 or 6, and try your very best to save that amount in the bank and don’t touch it! You will be able to sleep good at night knowing you have emergency covered!

#6 Medical Expenses:

Medical expenses can be a big part if your financial plan. There are different plans if you are working. Your employer will have High deductible plan(for people who don’t see doctor often), PPO (low deductible but higher monthly for people that needs to see Doctors or specialists often). There are HSA (healthcare saving account), which can have tax advantage, because you save it before tax. There are FSA, flexible spending account, which also have tax benefit. But there is a limit per year for how much you can put in and some don’t roll over to next year, which means you lose it if you don’t spend it, which in turn also require financial planning.

#7 Retirement Planning:

Are you looking to retire at age 62, 65, 67, 70, 72? Each age will have its pros and cons. The later you retire, you will collect more social security, but you may not be able to enjoy the retire as your co-worker or peers enjoy earlier in life. Have you invest enough in 401(k), or other financial savings, investments (CDs, bonds, stocks, real estate, etc). What will be your nest eggs? Heard about diversify, what does diversification looks like in your situation? Will you need to help your kids out or are they financial independent? Will you be a grand parent? Will you need to prepare for gifts for the next or next next generation?

#8 Various Insurances:

Insurance industry is one of the most lucrative industries. A lot of people buy the coverage they don’t need. So make sure do your home work and only pay what you need! At the same time, insurance is also critical, it will save you when an accident happens: a tornado, a hurricane, a car accident, a medical emergency. Besides the health insurance (#6 mentioned above), you will more than likely purchase disability insurance (usually company covers 60% of your salary if you can’t work due to injury or disease), life insurance (Company often provide basic life insurance coverage, but if you want to purchase extra, you can have it deducted from your pay each pay period), auto and home insurance (This require some homework and due diligence to compare and shop around rates based on your age, smoke status, gender, etc), LTC (long term care) is another very expensive insurance. We will break that down in the future.

#9 Estate Planning:

Estate Planning can be ignored by a lot of people, but it’s also critical piece. In case you become incapacitated, you should consider a POA (power of attorney) who can represent you to make healthcare and financial decisions.

Create a will, which include your wishes for your assets, dependents and who and how they are going to administrate your estate. In the will, you should also include the detail of your insurance policies and retirement accounts so your beneficiaries can execute your will accordingly.

#10 Review your plans once or twice a year:

The best plan, without execution, equals without a plan.

With the written plans in hand, thinking about it often, will guide you in life for many decisions you are facing to make, especially when purchasing something. It will eliminate your impulse buy a lot of scenarios. Review your plan twice a year, mid-year and end of year, will be a good discipline to stick with. See how much your net worth has crowed throughout the year, how fast, or slow they are growing. The trajectory it is growing, uptrend, hopefully!

Talk to your family or a financial advisor when you have confusions, or google and build your knowledge so you are not making that decisions blindly.

Best wishes to all your financial freedom in the future!