Financial Planning: The Basics

Financial Planning: The Basics

by Michelle Fabio, Esq., August 2016

The term “financial planning" may seem intimidating, but all it means is taking charge of the money matters in your life—and you can get started by learning more about what the financial planning process entails.

Some fundamental steps to personal finance management include creating a budget, managing debt and savings, providing for retirement, and estate planning. Below are some basic financial planning tips to help you develop your personal financial plan.

Creating a Budget

A budget helps you keep track of how much money you have coming in and how much you are paying out. Seeing the exact numbers can show you whether you are truly putting your priorities first when it comes to spending money and help you better direct where you would like your hard-earned cash to go.

If you are looking to put some money aside, creating a budget can help you cut expenses so you can put money elsewhere. Consider both short- and long-term financial goals when planning out your budget.

Managing Debt

Many people have various forms of debt from student loans to credit cards and, so long as you can manage the payments, it isn't a terrible thing. But if you're only paying the minimum amount due each month, getting rid of that debt entirely could take a long, long time—and that can end up being an enormous drain on your monthly cash flow.

One effective strategy is to pay off the debt with the highest interest rate first, by making payments above the minimum; if you still need to make minimum payments on other, lower interest rate, debt in the meantime, that's fine, but remember to keep moving down the list, prioritizing reducing your higher interest rate liabilities as you can manage it financially.

Not all debt is “bad debt," of course, as a mortgage, for instance, can be a nice tax deduction, but generally being as debt-free as possible is desirable in a solid personal finance plan.

Compiling Savings

Having a budget and paying down debt should result in your having extra cash flow each month—money that you might want to think about setting aside for a rainy day, as they say.

A sound first savings goal is to establish an emergency cash fund, to help protect you and your family in the event of unforeseen expenses—such as medical issues, home repair, or a job loss.

If you have children, you may want to look into 529 plans, also known as “qualified tuition plans," which are tax-advantaged college savings plans. Other options include UGMA (Uniform Gift to Minors Act)/UTMA (Uniform Transfer to Minors Act) custodial accounts, the funds from which can be used for reasons other than college, although always to directly benefit the child.

Still, financial planners generally recommend “paying yourself first," which means saving for your own well-being now into retirement—preferably through automatic transfers—before you start putting away money for your children's education. One reason for this is because you (or your child) can borrow money to pay for education more readily than you can for retirement.

Planning for the Future

If your job offers a full pension plan, you can take advantage of that. Otherwise, a good retirement savings option is an employer sponsored 401(k) plan, through which an employee contributes a certain amount to a retirement fund on a tax-deferred basis—that is, no taxes are paid on the money until it is withdrawn.

Both traditional and Roth IRAs can help secure your retirement. For self-employed people or small business owners, solo 401(k)s and Simplified Employee Pension (SEP) Plans also may be good retirement savings alternatives.

A sound financial plan addresses both protection and growth. Investments such as those in real estate, stocks, and mutual funds can help grow your retirement fund, but one thing everyone should consider is protecting themselves and their families by acquiring life, disability, and long-term care insurance. The right insurance coverages can help prepare you for the unexpected—accidents, disasters, or anything that might make it more difficult for you to earn an income.

Estate Planning

Putting in place a solid estate plan is one of the best things you can do as part of your financial planning, not only to provide for loved ones after you're gone but also to make sure your affairs are taken care of should you become incapacitated.

Some of the most common aspects of estate planning include:

  • Last will and testament: A will allows you to name someone to handle your affairs after your death and specifies how you wish your property to be distributed. You may also name a guardian for minor children in a last will.
  • Living will: A living will lets you define what type of health care you would like to receive—or not receive—should you not be able to communicate those decisions yourself.
  • Power of attorney: A durable power of attorney helps ensure your financial affairs are in order should you become incapacitated by allowing you to name someone you trust to handle financial transactions on your behalf. A financial power of attorney deals specifically and exclusively with money matters, therefore not with medical decisions.
  • Living trust: A living trust puts your property in a trust for your use during your lifetime to be turned over to your beneficiaries of choice after your death. All of this happens outside of the probate process, which tends to mean a faster distribution of assets with no added costs in taxes or fees.

Getting the Help You Need

Need help organizing your finances? Well, as with just about everything else these days, there's an app for that. Several apps, in fact, as well as websites, software, and online services. Lifehack's "Best 15 Money Management Apps that Make Financial Planning Easy" is a good place to start in your search for the right tool for you.

While many people choose to self-manage—or work with automated tools and apps to manage—their financial planning, a financial professional can provide insight into your family's unique situation. An advisor may also have access to additional financial planning tools.

Overall, the most important thing you can do regarding financial planning is to begin as soon as possible. Reading this article was a good first step, and now it's time to do more to take better care of your money now so that it can take better care of you in the future.

If you're ready to create an estate plan, you can take this quiz to help you decide which estate planning documents are best for your specific situation. You can also talk to an attorney who will point you in the right direction when you sign up for the personal legal plan. The personal legal plan includes unlimited 30-minute attorney phone consultations on new legal matters, tax advice from a tax professional, document review, and many other benefits for one low monthly fee.