When you hear the words “financial plan,” odds are things like investments come to mind. You may think of a Certified Financial Planner who has lots of government licenses to give specific types of financial advice. And you may also think about how much it costs to hire such a professional.
But financial planning is more than just a direction for your retirement and brokerage investments. I see financial planning as a comprehensive, holistic process where you look at all aspects of your money.
This includes your investments, but it also includes the everyday practices that enable you to build wealth.
Let’s discuss each of my ten components of a healthy financial plan and how you can put them into practice.
1. Make and Stick to a Budget
The word “budget” is like a curse word to some people (“don’t you dare use the b-word!”). But it doesn’t have to be that way. A budget is merely a specific plan for all the money you have available in a given period. It doesn’t have to be a straitjacket if you don’t want it to be.
Any well-run business has some sort of budget it operates on. Its owners and operators make revenue projections and then determine what needs to be covered with that money. This includes payroll, supplies, overhead, marketing, etc.
Your personal accounts also need a plan because you have important expenses to cover, too. This includes your four walls (food, utilities, housing, and transportation), subscriptions, cell phones, debt payments, etc.
But there are also discretionary purchases that make their way into your bank account if you’re not intentional. Over time, too much discretionary hinders your ability to build wealth. The budget keeps you track and shows you what adjustments need to be made so that you can do the things you want to do.
2. Make a Financial Plan to Pay Off Your Debts
Debt is a thief. It steals our income and makes other people wealthy. I say you should build wealth and create financial freedom for your family. But debt gets in the way of that possibility.
Getting out of debt is a hard process. It requires diligence, perseverance, and sacrifice. Many people in our society are unwilling to do what it takes to become debt-free. But if you are willing to do unconventional things, you can have unconventional results.
Pick a plan that resonates with you. There are three common methods people successfully use to become debt-free: Snowball Method, Avalanche Method, and Tsunami Method. I discuss each of them in detail in this article.
I am partial to the Snowball Method due to my experience, but choose one that will give you the highest likelihood of freeing yourself from debt. Devise a plan, follow it, and experience the breakthrough that comes from this transformational process.
3. Have Cash Savings for Emergencies and Short-Term Goals
Things happen. Your car breaks down, you lose your job, the dog needs an urgent vet visit, etc. It’s not a question of if, but when these types of events will happen. Are you prepared for them?
Having emergency savings gives you greater control of things when life tries to throw you off track. When one of those unanticipated major expenses comes up, you can use your emergency savings to pay for it. You can, therefore, avoid taking on new debt after the fact.
With the financial plan I teach, while you have non-mortgage debt, put together $1,000-2,500 in cash or in a savings account and let it sit there. This cash acts as a buffer against adverse financial events while you work on other things (like paying off your debt).
Once you have everything but your home paid off, save up between three and six months of expenses in that same savings account for a fully-funded emergency fund. I personally prefer the six-month amount, but whatever in that amount that makes you feel comfortable is what you should aim for.
4. Invest Wisely for Retirement
Investing is an important part of preparing for retirement. There will come a day when we are unable to work like we used to. Either we can only work part-time, or we must stop working due to physical limitations. Will you be prepared for when that day comes?
Good retirement investing will include taking advantage of the plan offered at work, such as a 401(k) or 403(b). In addition to this, look into opening an IRA to save even more. If your income level is below a certain threshold, you can make Roth contributions and allow your money to grow tax-free.
In your retirement and brokerage investments, be sure to have plenty of diversification. You can achieve this in mutual funds, index funds, and exchange-traded funds. Each fund will hold a variety of publicly traded securities. The spread will protect against several companies going insolvent so you don’t lose your investment.
I recommend connecting with an experienced investment professional to make sure you are doing this right. Ask your friends or family for a good referral to someone they trust. I also have several people in my professional network who I would be happy to connect you with.
5. Own and Pay Off Your Home
Homeownership is a critical part of long-term wealth-building and healthy financial planning. Real estate is one of the most successful long-term investments. While renting is perfectly acceptable for a season, homeownership changes the way you handle your money (and the way you interact with your community, as well).
Homeownership plants roots in the ground. It enables you to feel more solid in your housing situation and more connected to your community. There is even data that suggests homeownership helps children to have lower school drop-out rates.
When you pay off your home, you greatly reduce your overall living expenses and can start to build serious wealth. Imagine investing your mortgage payment into a good mutual fund. Instead of paying interest to the bank, you are making payments to your future self.
Put yourself in a good position to own a home if you do not own one yet. Pay off your debts, build an emergency fund, and save up as much as you can for a down payment – optimally 20% if you can, but 10% is also a good benchmark. And remember to have funds set aside for home maintenance as well.
In the Hampton Roads, VA, I highly recommend the team at COVA Collective Realty for all your real estate needs. Megan Anderson-Morris and her team are top-notch agents who will do an excellent job for you.
6. Have Proper Insurance Coverage
Investing and homeownership are examples of offensive wealth-building activity. But your insurance coverages are the defensive team that enables you to handle adversity that exceeds your ability to pay out of pocket.
In our contemporary world, we need to have certain types of insurance to protect ourselves and our families. This includes auto, homeowner/renter, life, health, and ID theft. I discuss each of these types of insurance in more detail in this article.
Each of these types of insurance protects against certain risks. We can avoid certain types of risks by changing our behaviors, but others are not always avoidable (car crashes by drunk drivers, accidental death, credit card fraud, etc.).
Proper insurance coverage in each of these critical areas is an aspect of your financial plan that can’t be overlooked. Yes, there is a cost involved. But the question is if you can afford the cost of one of these adverse events happening instead.
Your policies transfer this risk to the insurance company, and you pay a premium to account for that. You can reduce your premiums by increasing your deductibles, having good driving records, living a healthy lifestyle, and having certain safety features in your home. Speak to an insurance broker in your area to get each of these insurance protections in place.
7. Make an Estate Plan
No one likes to think about death. But we are all mortal, and will one day pass away from this earth. One of the ways that we can tell our family that we love them is by setting up a plan for when that day comes so that loved ones are not left in limbo.
A proper estate plan consists of a will and/or trust, medical directive, and powers of attorney. The will and trust cover your assets and direct where they should go upon your death. A will is open to the public and goes through probate court. A trust, on the other hand, is private and passes property according to the trust’s terms.
Medical directives give specific instructions on your care in the event you are incapacitated and cannot make decisions for yourself. You ought to also include end-of-life instructions if you are in a vegetative state. (i.e., should the doctors continue artificial life support, or pull the plug).
Durable powers of attorney enable your designated person to make certain decisions on your behalf as well. This can include anything you want to delegate to another person in the event you are incapacitated.
These documents need to be drafted by an attorney licensed to practice law in your state. For folks living in Tennessee, I will be an attorney in late 2022 as long as I pass the July 2022 bar exam. I plan on practicing estate law, so stay tuned for that!
In the Hampton Roads, Virginia area, I highly recommend the attorneys at Hanger Law in Virginia Beach and Newport News.
8. Enjoy Your Money
You work hard for what you earn. You pay off debt, build up emergency savings, pay off your house, and invest for retirement. But what about enjoyment? Well, that’s an important part of a healthy financial plan, contrary to what some may think.
You see, money is not an end goal. It is a vehicle and a tool. Money is something you use, not something to center your life around. That means all things must be done in balance. A healthy financial plan will make room for enjoyment in your budget, especially when you are debt-free.
How you do your spending is up to you. What’s important is that you do so intentionally and know where it went, and what the opportunity costs of such decisions are.
When you plan out your fun spending while also doing the other important things previously discussed, you can have fun and not feel guilty about it.
9. Be Generous with Your Money
In addition to spending, it is good to give to others. In fact, giving can be some of the most fun you have with money.
Imagine you’re in a really solid financial position. You’re at your auto mechanic and see a young single mom at the counter discussing a car repair she needs. But she can’t afford it and doesn’t know what to do.
What if you could step up and cover the cost for her? Wouldn’t that be amazing?
Determine what causes are close to your heart. This can be anything from supporting crisis pregnancy centers, to substance abuse assistance organizations, to your local church. Where you give will depend on what aligns with your principles.
Additionally, generosity is not merely an external act, but a disposition of the spirit. Practice generosity financially, but also in how you interact with others. Such a spirit tends to attract others to you and enables you to grow your social network and your net worth.
10. Make Values-Based Financial Plans
Finally, as a common denominator among all the previously discussed points, make decisions based on what your values are. Determine who you are as a person and set those convictions clearly. Spend, save, and give in accordance with your system of values.
The idea is that you are living a holistic and integrated life. Your financial habits and practices reflect what you say is important to you. A saying that some of my fellow coaches (and I) like to say is “Show me your calendar and your bank statement and I’ll show you what you value.”
Make your calendar and your bank statements reflect what you believe. Set forth your principles clearly and live in a manner consistent with those beliefs. Out of the abundance of the heart, the mouth speaks and the wallet opens. Let your financial decisions reflect on your heart in a way that you can be proud of.
Closing Thoughts on a Healthy Financial Plan
There is a lot of complicated stuff in the financial world. It’s understandable if it all seems intimidating. But you can do the important things that lead to wealth.
Complex math equations and risky real estate deals are not what lead to wealth—it’s simple but difficult habits and mentalities. You can pay off your debt; you can have emergency savings; and you can build wealth to achieve financial freedom.
Begin with a wealthy mentality and you can build a wealthy reality. From this mentality, all of these previously discussed pieces of your financial plan can fall into place based on the desires of your heart. Now go get it!
To start your financial transformation toward wealth and financial freedom, book your free Discovery Session today!