By Amy Miller, AFC®
Nationally, October is observed as Financial Planning Month. Investments are often thought of first when the term “financial planning” is used, but it is more than just that – financial planning is looking at the entire picture of your financial situation and future. It is taking a comprehensive look at every aspect of your finances, setting goals, and making plans to reach those goals.
Financial Planning is an ongoing process that many find complicated and intimidating, but it doesn’t have to be. Having a good financial plan can reduce stress and help you feel more confident in your everyday life and when tackling an unexpected financial hurdle.
Below are a few steps you can take this month to plan, take control, set goals, and become more financially fit.
Step 1: Outline Your Current Financial Situation
Assess where you are financially. Start by outlining your current income and expenses including loans/debt (review all loan terms and interest rates), then track your spending and create a budget or spending plan. Tracking your spending for an entire month, rather than just a week, can provide you with the best information. Knowing where you stand can help you change directions and focus on the areas that need the most attention.
Step 2: Organize
It is extremely important to have your personal and financial documents in order and stored in a safe, secure place. As we’ve previously discussed, active-duty service members are 76% more likely than other adults to be victims of identity theft due to the increased possibility that others may have access to their important documents during deployments and TDYs.
Step 3: Check Your Credit Report
Reviewing your credit file from each of ‘The Big Three’ credit reporting agencies (Equifax, Experian & TransUnion) is a critical step in the financial planning process. Knowing your score, what is being reported, and how much credit you have available is a critical piece of your overall financial health. All Americans have the right to request their credit reports for free by visiting AnnualCreditReport.com. You can also read more about understanding your credit report here: Understanding Your Credit Report. According to a study by the Federal Trade Commission, one in five consumers had an error on their credit report. It is important to know how to dispute and correct those errors. Here’s an article that may help.
Step 4: Manage Debt
Not all debt is bad – some, like a mortgage for example, can help you achieve homeownership and build generational wealth. However, high-interest debt can be detrimental to your long-term goals and financial health. Taking control and managing debt is another key component when creating a financial plan.
In general, there are a few strategies that can help when paying down debt. The Snowball Method involves paying the smallest debt off as fast as possible while paying the minimum on all other debt, while the Debt Avalanche method focuses on paying the largest or highest interest rate debt down first. There is also the option of combining all debt into a consolidation loan.
Managing your debt is an essential element of a good financial plan. A successful plan requires dedication and discipline.
Step 5: Set Goals
Setting realistic goals is critical to financial well-being. Goals provide guidance and motivation. I typically recommend setting 3 types of goals:
Short-term: These are goals that can be accomplished within 1 year. A few examples are
- Tracking expenses
- Discussing and agreeing on a spending plan/budget with your household
- Starting or adding to an emergency fund
- Reviewing beneficiaries, Creating Wills & Power of Attorney documents
Mid-term: These are goals to be completed within 1-5 years and consist of things you will work towards after you have accomplished your short-term goals. Examples include:
- Purchasing a new home or automobile
- Starting retirement planning & saving
- Growing your emergency fund to cover 6 months’ expenses
- Starting a college savings account for your children
Long-term: These are goals that you would like to work toward in the future – in more than 5 years and can include:
- Planning your retirement
- Paying off your mortgage or purchasing your “forever” home
- Paying for college
Step 6: Write Out Your Plan
Putting your plan in writing is always beneficial. A carefully written plan outlined on paper typically has a significantly higher chance of success – around 42% according to a CNBC report. It can help to narrow your focus and provide motivation. Writing out your plans and goals forces you to face your financial challenges and fears. A written plan can also provide clarity. Seeing the plan in writing can directly affect our actions and inspire productive change that will impact financial health for years to come. Taking control and becoming more financially fit truly starts with a written plan.
Review, Review, Review
Finally, your financial plan will change as you measure your progress and achieve your goals. Reaching targeted milestones and/or life changes will warrant a re-assessment and re-aligning of priorities. Reviewing and updating your plan is key to creating lasting change and improvement in your financial life.
It is generally recommended to review your financial plan at least once per year. I typically recommend a review once per quarter when just starting the process or when you’ve experienced a life change like a new job, a move, a new baby, or if you are just at a point when you don’t know what your next step should be. You can extend your review period as you achieve goals.
A helpful tip is to go ahead and set the review dates once you have the plan in writing. Don’t rely on your memory – set calendar reminders to keep you on track.
Financial plans that are reviewed regularly are greatly beneficial and can help ensure you are meeting your goals. It truly is a measure of your financial health and well-being. I hope you find this blog beneficial in the process. Happy Planning!