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The Seven Fundamental Steps of Financial Planning

Money flows through every corner of our lives. From daily expenses like groceries and rent, to that unexpected cost of getting new tires. From birthday parties and family vacations, to college funds and retirement. Just as important as it is to make money, it is important to have a plan. 

Financial Planning is about making choices, setting priorities, and understanding the consequences of the choices you make. Each person’s financial plan is entirely individual and dependent on how their values and priorities play into their financial goals. However, there still are fundamental steps that each individual should take when designing their personal plan.

  1. SMART Goals: What do you want to achieve and when?

Goals are extremely important in defining the course of your financial plan. What is most important to you? School, a house, retirement? When goal-setting make sure that you use the SMART method: Specific, Measurable, Attainable, Relevant, and Timely. If you follow these factors, you are much more likely to achieve your goals.

  1. Budgeting: What are your priorities?

First off, what is your budget? To find out, total all of your forms of income (paychecks, rental income, government benefits, interest, and investments) and then subtract your expenses (fixed and discretionary). Whatever you have left over is your surplus. This is where daily choices can affect long term goals. How you use your surplus today may detract from what you can have for tomorrow. It is important to find a balance between saving for future goals and living a lifestyle that makes you happy. Relate back to your goals, how can you use your surplus to tackle your SMART goals?

  1. Emergency Fund: How do you create security?

Emergency Funds give you the ability to tolerate things that you cannot control. Whether that be a pandemic, a medical emergency, a roof leak, or something else unexpected. It is important to keep your emergency fund in a savings account that is not easily accessed. Although anything is better than nothing, ideally this fund should be able to cover 3-6 months of living expenses. 

  1. Insurance: How do you manage risk?

Insurance is simply paying another company to bear the risk of the loss you suffer. Insurance typically has a deductible that you are responsible for paying, which equates to how much you can afford to risk. Insurance is not an investment, it is used to manage risk or provide for others in your absence if you are unable to work. Consider these types of insurance: Property and Casualty (auto, home, etc.), Health (medical, dental, vision, etc.), Disability, Long Term Care, and Life. 

  1. Using Credit: When should you use credit?

Credit is the exchange of goods, services, or money for a promise to pay a definite sum of money at a future date. Common types of credit are credit cards, student loans, mortgages, and auto. Although there are definite uses for credit, it is important to remember that credit creates debt. Therefore, it is really important to not finance your lifestyle with credit. Using credit cards is ok only if you can pay off each month. If you find yourself with continuous debt building, seek assistance. Credit card debt and student loans often have very high interest rates, therefore you should prioritize payments towards them. Balance between paying off debt and contributing to your Emergency Fund, reason being, if you don’t have an Emergency Fund, you will have a greater chance of building up more debt. 

  1. Investing: How can your money work for you?

Investing is not meant to be intimidating, in fact, it can really help you towards accomplishing your goals. Often the first investment you make is in a company retirement plan, which can often offer systems of setting aside portions of your pay every month towards retirement. Investing has a direct relationship between risk and return, the higher the potential risk, the higher the potential return. Each individual needs to assess their personal risk tolerance based on their financial short and long term goals, their life stage, their investment experience, and their personality. One key aspect to successful investing is diversity. When you invest, make sure you include a variety of holdings, such as stocks, bonds, real estate, and cash. Another key aspect is to start early. The longer you give your money to grow, the more you will have to reach your goals. 

  1. Estate Planning: What is your plan?

Estate planning allows you to plan for the future of your estate beyond your life. Creating a will allows you to decide how your money will be distributed, how your children will be cared for, and who will be responsible for carrying out your wishes. As much as we may not like to think about worst case scenarios, it is important to be prepared to protect the people we may leave behind.

Overall, when beginning your financial planning journey, it is important to start by setting goals. Understand what you want to accomplish with your finances by setting priorities based on your personal values. After that, manage your security and risk by creating an emergency fund and investing early. Have a plan that guides your choices and allows you to create a lifestyle and future that is balanced and secure. 

The Seven Step series will continue in a few weeks with our next blog post “How to Budget Yourself for Success”, keep an eye out to learn more about how to budget and begin your Financial Planning Journey.

If you want help on your Financial Planning Journey, contact us to learn how we can develop a personal plan to reach your goals. We can be reached at (480) 214-9596 or info@scfinancialservices.com.  Thank you!