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Three Step Financial Plan

Should you hire a financial planner? Maybe, maybe not. There are many factors that lead to that decision, but I’ll leave that for you to find on an unbiased site, as opposed to the opinion of a financial planner.


If you choose to not hire a planner, where do you start on your own? I don’t want to minimize the value of financial advice - I’ve put in over 10 years and a lot of money into learning it! But I think that it can often be broken down into much simpler steps.


There are many products and financial jargon, as well as different names for financial professionals - is it on purpose to confuse the public? Probably.


But there are also many financial planners out there who are doing great work and not utilizing these confusing tactics to bait individuals into products.


Anyways, there is a lot of knowledge and expertise that goes into building a comprehensive financial plan. This includes things like estate planning, insurance planning, tax planning, asset protection, and many other planning items above and beyond just your investments, depending on your situation.


But for many young professionals, the meat and potatoes of financial planning is cash flow. This is your biggest asset and will be for many more years! How are you utilizing your cash flow to get to where you want to go?


Below, I’ll go through the three steps that I think are a great way to get started without a financial planner.


Where are you now?


It is hard to say how fast or slow you’ll get somewhere, if you don’t know where you’re starting. If you want to pay off your $100k of debt, and have $50k saved, you will pay it off much faster than somebody who has nothing saved and the same amount of debt.


In order to understand where you are, I would suggest building yourself a net worth statement. This details all your assets, alongside your liabilities.


Everything you own and everything you owe.

The net of the two is your “net worth”.


Some common assets include bank accounts (savings and checking), investment accounts, retirement accounts, college savings accounts, real estate properties and business interests.


Some common liabilities include student loans, car loans, mortgages and credit card debt.


This first step is solely to observe where you are - not to add any judgment, but to set a base for yourself to know where you're starting. This helps with both making decisions, as well as something to look back on to see the progress you’ve made.


Where do you want to go?


Now that you know where you are in your savings journey, the next step is to determine where you want to go.

This can be synonymous with setting goals, or whatever you want to call them. I suggest thinking through short, medium and long term ‘goals’.


You can spark some ideas by not only thinking about things you want to purchase (like a house, vacation, car, etc.) but also thinking about what your savings journey will do for you.

This can mean early retirement or taking a longer sabbatical from work. It could also mean having more peace of mind with your finances, or using it to work less hours during a time when you have young children.


Everybody has different motivations behind what they want to do, so I really suggest thinking about your individual ‘why’. If your goals are based on what you think you should be doing, or what Dave Ramsay shames you into doing… you should rethink them.


For me, I always got my company match and sometimes added a little more in my retirement account, but I focused more on saving outside of these accounts. I didn’t know exactly why, but I knew I wanted some extra flexibility by having access to the money.


This eventually turned into income replacement while I build Pocket Project. Some people would have thought it silly that I could max out my 401(k), but chose not to… but that is because they didn’t know what I was saving for. It was for my own personal goals outside of retirement saving.


Your goals are yours, and determining these for yourself shouldn’t be influenced by others, or cookie cutter financial advice.


There is no financial document that can create this for you, so I’d suggest taking some pen and paper, and making three columns with the headings “short”, “medium” and “long” to fill out your goals and when you’d ideally reach them. Then take your time, and start thinking about where you want to be, and why it’s important to you.


How will you get there?


You can’t make a plan if you don’t know where you want to go - this is why the goals discussion is so important to create before the financial plan. A well known financial spokesperson named Carl Richards says it best: “that would be like arguing over whether we should take a train, plane or automobile on a trip before we’ve even decided where we want to go”.


Your goals should influence your plan - not the other way around. Additionally, the timing of when you want to achieve your goals have an impact on where and how you’re saving your money.


The best way to start achieving your goals is one step at a time. We can get really fancy with Monte Carlo simulations, cash flow projections, or something of the like. Unless you're an excel whiz, this is more work than it is worth for this over simplified plan.


I suggest coming up with a one year cash flow summary. Some may call this a budget, but I think even a budget is too much work.


With a one year cash flow, you’re going to start with your gross income. The amount of money you make before taxes, spending, or anything else.

Once you have your gross income, now you need to find three numbers associated with this, in both dollars and percentages: taxes, spending and saving.


Taxes are made up of the three most common: payroll taxes, federal income taxes and state income taxes, if applicable.


I want to point out that the amount that hits your bank account isn’t necessarily your net pay after taxes, since there may be medical insurance premiums, retirement plan contributions, HSA contributions, or other company benefits that are paid through your payroll.


Now that you have your net income, or after tax income, we can see how much is available to you to either save or spend. These are the next two numbers to determine.


Save: I recommend starting with this number, and making a plan with how much to save in order to reach your goals. Saving may include retirement, cash accounts, paying off debt, or any other account that will accumulate wealth for you.


I can’t give too many rules of thumb here because of everybody’s different situation, but I like to push for a 20% savings rate. If you want early retirement, or to pay off high student loans early, then this rate will need to be increased. But get a gauge for what is possible, and make a plan with how you’re going to save that money.


Lastly is spending. I say this isn’t budgeting, because I don’t think it is worth it to go into detail about what you’re spending on. As long as you’re able to hit the savings goals that you’ve set, and you're able to spend within the rest of your income, then it doesn’t matter what you spend on, as long as it brings you joy.


Final thoughts


This is a pretty simplified approach to a “financial plan” and leaves out a lot of the other pieces like insurance planning, tax planning, and many other factors. But having a cash flow plan alongside an idea of what you’re working towards can start moving the needle for you.


Nobody can produce a perfect plan on day one - including a professional. Things will be changing and you’ll continually be adapting to these changes. But setting something in motion, and getting a little better every day is how you can start compounding your results.


No doubt there are benefits of a financial advisor beyond these three items, like helping you put this plan in place, giving further recommendations on how to invest or get insurance, and holding you accountable to what you said you’re going to do.

But if you’re not ready for the cost or commitment, start getting something in writing and work towards improving your finances, one step at a time.