How good are you at managing your personal finances? If you suck at financial planning, don’t sweat it. We all have been at some point in our lives! But there is good news… you don’t need a financial advisor to have a better handle on your personal budget. You also don’t need fancy budgeting software.
But first, what is financial planning?
There are two types:
- Business Financial Planning
- Personal Financial Planning
According to Wikipedia, business financial planning is “the task of determining how a business will afford to achieve its strategic goals and objectives.”
Personal financial planning, according to cfp.net (Certified Financial Planner Board), is the process of determining if and how a person can meet certain life goals through the proper management of their financial budget.
It is easy to get intimidated by the idea of tackling your budget and overall wealth, especially if you have bad money habits and you know you’re not going to like what you see. However, if you don’t address your personal finances, and if you have no idea where you stand, things will only get worse, and it will be even harder to get out of debt.
When you think wealth, you probably envision white collar business folks sitting across from a Certified Financial Planner discussing whether their finances would permit them to purchase their own island in BVI. You know, right around the bend from Richard Branson’s.
There’s no way I could afford to hire a CFP to manage my finances, I don’t even have much to manage.
The good news is that you don’t need to hire a professional to regain control of your debt, cash flow, savings, and investments. You can do it yourself by simply following the same guidelines and steps.
Here are six steps used by Certified Financial Planners that will enable you to do your own financial planning:
- Analyze and evaluate your current financial situation
- Create your financial goals
- Develop recommendations
- Identify alternative courses of action
- Implement these recommendations
- Monitor the recommendations and if necessary, revise
Step 1: Analyze and evaluate your current financial situation
In this first step, you will determine your current financial situation, taking into account income, savings, living expenses, debts, and any other financial obligations. Having a method that tracks all of those items will make it that much easier for you to keep careful track of your personal budget. This “tracker’ of sorts will be part of your budget planner.
Step 2: Create your financial goals
To do this, you first need to separate your needs from your wants. We all have an endless list of wants. However, what do we ACTUALLY need and how does it affect our personal budget? If the budget allows it, what can we check off our “wants” list? Once this list is created, it will be part of our financial goals that go into our budget planner.
Step 3: Develop recommendations
Here you will come up with ideas of how to reach your financial goals.
For example, your financial goal may be to purchase a new car because your current car has 180,000 miles on it and has been giving you some trouble.
One of your ideas is to go out and buy a new car with cash from your bank account and leave the old car in your garage. Another idea would be to subsidize your new car by buying a new vehicle, then selling your current one for cash that will reduce the overall cost. Lastly, you can decide to lease instead of purchasing.
Each decision above has its pros and cons, and it is up to you to make the smartest decision that will help you ultimately meet your goals. Having some kind of personal finance software or budget software may be super helpful. If you don’t want to invest money in budget software, you can always create one using Microsoft Excel. There are many useful budgeting Excel tools out there for personal finance. Find the right one and most importantly, USE IT!
Step 4: Identify alternative courses of action
Here you will explore other possible ideas. Maybe the initial strategies weren’t your only options. You need to take into consideration your current life circumstances, personal values, and economic situation. As mentioned above, this is more easily done with some budget software or by building and utilizing a personal budgeting tool in Excel.
Using the car example, your alternative course of action could be leasing which again, would have its pros and cons. Leasing may be your best course of action if you know you have the income to sustain the future payments but need the cash to put as a down payment on a new home. The assumption here is that your income is high enough to sustain both monthly payments (home and car).
Another alternative could be waiting until you get your tax return and using that to subsidize your new car purchase. You get the idea.
Step 5: Implement these recommendations
This is the action step. After you have come up with a list of ideas and alternatives and have laid out everything in some sort of budget planner, you now need to put them into action.
You will choose the path that makes the most sense taking into account your personal budget, future earning stream, current savings, current and future expenses, etc. The implementation process may sometimes be a group resolution. For example, if you are married and have a family, taking the pre-determined course of action may be a combined effort between you and your significant other. It could also include your children.
Maybe you are trying to figure out how to pay for your child’s 4-year college education and one of the courses of action from steps 3 and 4 involves your child also contributing to their tuition and other college expenses. They may need to get a job allowing them to put aside $3,000 every summer. Creating and implementing a plan like this would require group discussion and mutual understanding to ensure that steps are followed, so the money is available when it is needed.
An excellent way to get this done in a more streamlined manner is for each member of the family to have a personal budget tool that they will use for themselves. You determine how much each member needs to contribute and the tool or software will help you track and ultimately determine whether these action plans can be maintained for the period required.
Our Automated Personal Budget Spreadsheet
If you are too busy to create a personal budgeting tool for yourself or just don’t know where to start, feel free to download this one from us. It is an automated Personal Budget Spreadsheet that we custom built and regularly use ourselves. You can also watch this YouTube video to see how it works before you buy it.
Step 6: Monitor the recommendations and if necessary, revise
Financial planning is a process that is always changing and evolving. You could have a plan laid out and six months later lose your job. Contrastly, you may have a financial strategy that ends up changing after three months because you change your career and now earn 40% more.
The future can be for the better or for worse. So, it is essential that when you experience personal or economic changes that can affect your personal budget, you revisit your budget planner and make the appropriate updates to it.
It is crucial to make sure that at all times, you have financial goals and objectives that are in line with your current life situation.
It’s nice to have a Certified Financial Planner who can help you when it comes to managing your personal finances. However, as you can see, it isn’t necessary. If you have the money to pay for a professional, go for it. It’s like hiring a CPA to do your annual taxes. You can do it without them by using readily available tax software. However, it’s much easier and less stressful to have someone else do it for you.
Unlike filing your tax returns, Uncle Sam doesn’t come after you when you have messed up your financial planning and have fallen into debt. You can go back to the drawing board and fix your mistakes without worrying about landing in jail for possible tax evasion. A bit extreme, but, you get the picture.
So again, don’t be afraid to try creating a personal budget and putting together a financial roadmap for yourself. This will allow you to be more cognizant of where your money is going. If your debts are high, being close to your finances will make it easier to say no to irresponsible spending habits.
Maybe you don’t deserve two venti cups of coffee every day from Starbucks or two glasses of wine every night. Perhaps one cup or glass is good enough. Maybe you can cut back to just weekends and put the rest in your savings jar so you can afford to go on that family Christmas trip that you thought you were too poor to afford. Life is all about choices. Create a proper financial plan for yourself that will allow you to enjoy all of what life has to offer, the responsible way.