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Nobody knows what the future brings, but you probably know what you’d like it to bring. How do you think you’ll make that happen? Do you think that if you just work hard aimlessly you’ll get where you’d want to be? Have you ever cooked a meal without getting the ingredients in the house, of course not – everything worthwhile need a plan to accomplish. let’s talk about making a financial plan, you’ll agree that your financial future it worth it, I hope?
“Failing to plan is, planning to fail “
– Benjamin Franklin (allegedly)
Why a financial plan?
Everybody needs a plan, without one you’re just swimming without knowing where the shore is and drown. This doesn’t mean you won’t achieve anything without a plan, in fact you probably will – this is why many people feel they don’t need a plan. But wouldn’t you have achieved that accomplishment sooner if you knew your goal? Or perhaps you’ll end up somewhere you don’t want to be – because you swam the wrong way?
To the doubters I say, it can’t hurt you – and if it does, that means it’s working, because you’re realizing you’ve been doing things wrong. It’s never too late, just make a plan, you won’t regret it.
What is in a financial plan?
Where to start!? Begin with the end in mind. Any plan should get you where you want to be, so it should definitely have an end goal (or probably multiple goals). Equally important is a personal assesment , most importantly the reason or motivation that drives this plan – without proper motivation you won’t keep up the good habit of saving and/or investing, and of course an assesment of your current situation. You don’t know how far you’ll need to go if you have no idea of where you are today.
Once you’ve assesed your reasons, current situation and desired goal – all that is left is to define the steps to get from point A to point B, what will be your approach and how are you going to follow-up to check your progress.
I will take some time to go through each of these different parts of a financial plan that is as complete as I can make it – but do let me know in the comments below if you’re missing something.
As you’ll see throughout this tutorial on making a financial plan it is essential to think in S.M.A.R.T. terms. Meaning that it is important to make your goal(s) SPECIFIC, your progress MEASURABLE, you’ll need to make your goal(s) ATTAINABLE in order to keep your motivation by keeping your approach REALISTIC. Lastly, it is important to make your goal(s) TIMEBOUND, telling yourself when you should have achieved certain checkpoints, but also to make you realise somethings will be a longterm goal that will require alot of motivation and discipline.
Where do you want to be?
No plan exists without a reason for it being made – what is your reason? It should be a bit more specific than ‘I want to be rich‘. In this section, I will try to help you to put those reasons into attainable goals.
It is important to stress, that although it might be helpfull to think about where you might be going, it is more important to think about where you want to be going. Keep control over your journey. That said, keep in mind that your journey set out today can take plenty of detours or decide a different destination alltogether, be sure to revisit this part regurarly.
Examples of clear financial goals that might come to mind, and are important goals to reach are getting out of consumer debt (not emphazing the mortgage, but it might be your dream) and setting up an emergency fund to make sure emergencies don’t become disasters.
Other goals that you might want to achieve are linked to upcoming life events, let me sum up a few:
- Buying or selling a home
- Getting married or divorced
- Raising a family
- Funding children’s education
- Pursuing a career and/or getting a new education
- Starting a business
- Dealing with aging parents
- Retiring (early)
Find your WHY
Having a list of desires is great, but they might require quite some dedication and sacrifice, to keep yourself from spending money on luxury goods instead of saving up for those goals. You will need to write down why that specific goal is important for you, what is your motivation?
An interesting way of looking at your need for certain goal is by looking at Maslow’s hierarchy of needs (figure below), which can be used in this context to prioritize your type of motivation. The higher you get in the pyramid, the more personal the motivations will get. The basic needs are things most will be motivated to go for. Everybody needs to eat, drink and sleep (buy a house?), most people love to feel safe – retirement security could fall here. The psychological needs already get more personal, there are many ways one can feel belonging, whether it is being part of a sportsclub or whether or not to get married and raise a family. Similarly, some put a lot of value into esteem, feeling pride because of achieving a high level of education or having a high paying jobs (side note: these are not necessarily the same thing). The highest level of need, that many never achieve by the way, is self-fullfiment – being the best you can be – a first world problem so to say.
If you’ve read more of my articles, you might find that it has a lot in common with the different TILEs on ‘The Infinite Ladder of Equity‘, but also the ‘Fullfilment Curve‘ so check those out as well if you haven’t already.
While everybody has different motivations, there is an order of operation where you’d need to get out of consumer debt before worrying about early retirement. It’s easier to get motivated for the former than the latter.
Once you’ve discovered your emotional reasons behind your desires, you can either discover that it isn’t actually that important to you or that you’ll be willing to sacrifice everything in order to achieve it.
If you know you’ll need 1.5 million in order to retire in 10 years, and you’ve got zero saved you’d better be ready to invest 120.000 every year and get ≥5% returns; well first, you’re maybe not realistic, second you’d better be motivated.
“If you don’t design your own life plan, chances are you’ll fall into someone else’s plan. And guess what they have planned for you? Not much.”
– Jim Rohn
What is your current financial situation?
Once you’ve identified your goals and how to keep motivated to reach them, it’s time to find out your starting point.
You will need some facts to get to know what you’re working with, you’ll need to have a good idea of your assets and liabilities in order to get an idea of what your net worth looks like now. If you haven’t done this before, use my net worth calculator to get the full picture, a detailed description can be found here.
The next important numbers you’ll need are the one in your cash flow statement, this is a collection of how much comes in and how much goes out, and the spending pattern. You’ll need to get a good idea if it follows your budget, identifying how much you’re spending on your Needs, your Wants and how you are currently saving. Once you’ve tracked your income and expenses, you can also have a look at your savings rate. Can you already identify some areas of improvement?
Depending on your love of numbers, this might be a hard sit through, but it is worth it – if you don’t know where you are now, how would you ever find out how to get where you want to be?
“I love it when a plan comes together”
– Hannibal Smith
Find your HOW
Now you know where you are and you know where you want to be, what’s left is how to get from point A to point B and determining your strategy to stay the course.
Define & specificy
Knowing what you have and what you need automatically brings you to what you’ll need to get. Define how much this is, and where you’ll get it from? Can you save it from your salary or do you need another source of income? Is this realistic? Don’t count on the lottery to provide you with early retirement.
Maybe you’ll need to spend less and earn more, better know it now. Also think about protecting your goals with proper insurance, if your dependent on salary think about insurance to protect you against job loss. If you aim to take care of your family, life insurance might allow you to continue to take care of them after you’re gone.
Give yourself deadlines
If you don’t guide your goals to a certain point into the future, they will float in front of you indefinetely. Those who give themselves 100-years to reach a goal will take 100-years to reach them, those that give themselves 5 will get there in 5 and those who don’t give any deadline will never reach the finish line.
Be sure also to build in quick wins, short deadlines for small victories will allow you to build momentum and keep yourself motivated to keep pushing through. It is hard to only save for retirement 30 years in the future, also be sure to save for something to enjoy this year.
Measure your progress
What gets measured, get’s managed, the same is true for your progress. Timely check-ups will give you the opportunity to redirect your efforts when your goals are not progressing with a deadline that is always coming closer. It will also allow you to reflect and redefine your goals, as nothing is set in stone and life changes and its priorities with it.
Think ahead of the following, what is your method of tracking? Will you use a spreadsheet to keep sight on certain numbers, or will you be making notes on your calendar as you go along? What is the frequency of follow-up? Will you be updating your cashflow monthly, you net worth annualy and your investment portfolio quarterly? What form will the follow-up take? Will you be talking to a financial adviser, or sit around the kitchen table with your partner or just scroll through your spreadsheets on a Saturday morning? What ever method, frequency or form you choose, choose it deliberately and in advance.
“A goal without a plan is just a wish.”
– Antoine de Saint Exupéry (allegedly)
Final thoughts
I think that it is important to understand the power of reflection, and making financial plan really gives you the opportunity to reflect on what you want to achieve and what is needed to turn your dreams into reality.
It can feel like an daunting task, and I know I take too little time myself – but I cannot stress how much better it feels to have some kind of overview, even if you know that everything can change in a year – especially then, because you’ll know not to waste time, energy or money or things that were never a priority anyway.
Thinking ahead is crucial, but action is essential. START MAKING YOUR PLAN AND IMPLEMENT IT NOW!
I am making the financial planning process a part of my new year habits – take my time to reflect on what my goals will be starting the new year. Are you going to join me?
Do you have a plan? What is your goal and will you get there without any help?