The Wealth Pillar: 4 Steps to Personal Financial Planning – Brainerd Dispatch

Not everyone needs a full retirement plan.

Your financial situation is probably pretty simple: you’re in your twenties or thirties, working your first or second job. You don’t have a lot of credit card or college debt but maybe you’re trying to save for a car or a home for the first time. You can create a personal financial plan in four simple steps that will prepare you to pursue these goals.

Having good information about your finances is the foundation of a good personal financial plan. Here’s what you’ll need to determine your assets (what you own) and liabilities (what you owe):

• Investment account data: Taxable brokerage accounts, 401(k) and/or defined pension, IRAs, Roth IRAs,
• Your total indebtedness, such as school loans, car/boat loans, insurance premiums, mortgage, equity line of credit, etc.
• Estimates of any expected inheritance in the future.

Next, you need to compile records showing your income and expenses for the past year or two:

• Your annual salary (W-2),
• Income from excavation work if you are a contractor or significant worker (1099),
• Certificates of Deposit (CDs), interest from money market accounts or savings bonds,
• taxable profits,
• Your bank, your credit card account statements.

For expenses, you’ll need to make two lists: what you spend on nondiscretionary items (like groceries, utilities, health insurance, clothing, transportation, child support, annual debt payments on each of your loans, taxes, etc.) and what you spend on things” fun” (e.g. eating out, travel, entertainment, hobbies, charitable donations, etc.

What do you owe, and how do you intend to pay it? Make sure you understand the interest rate you are paying, and whether the rate is fixed or variable. Are any of them tax deductible?

Conventional wisdom says to pay off your largest loan first. This may make sense depending on your tax situation, the interest rate you pay, and whether debt creates value.

Most people agree that you should also pay off your higher-rate debt as quickly as possible, especially now that interest rates are poised to rise, according to the Federal Reserve.

Never pay the minimum balance on any credit card. You will find it difficult to get out of debt and will over time pay much more than you would have bought in cash.

We strongly believe in using credit cards only for convenience, not because they give you the ability to put off payment for something you want. We generally advise customers to have no more than one or two credit cards and pay them off in full each month.

Are you risking too much or too little of your investment? If you’re saving for a major purchase in five years, such as a home, you’ll likely want to put your savings into conservative accounts, such as a money market fund. On the other hand, if you’re saving for retirement which may be 20 or 30 years away, you may be able to take on more risk in the form of holding more shares.

Over time, as you approach your retirement date (say, 10 years) and depending on your personal situation and risk tolerance, you will likely maintain some exposure to stocks, but gradually seek more conservative investments such as bonds or cash.

Stick to low-cost, highly rated funds that you understand and rebalance once a year around your target allocation (ie the percentage of stocks and bonds you like in your portfolio – this should adjust as your risk tolerance changes).

Rebalancing means selling your winning money and investing the proceeds in your underperforming, maintaining the amount of overall portfolio risk you feel comfortable taking on.

Once you’ve dealt with your assets, liabilities, income, expenses, and how to invest your long-term retirement money, you should be in a good position to build a business budget.

Here are some tips to help you get started:

• Separate your wants from your needs. Minimize desires as much as possible.
• Build an emergency fund for six months of living expenses.
• Pay off credit cards with high interest and small balance.
• Get into the habit of saving a little each month and increasing it over time.
• Don’t forget to include your retirement plan contributions as a budget item!

This simplified four-step personal financial plan is a good way to gain perspective on financial independence. If you need help getting organized, consider working with a financial advisor to help build a comprehensive financial plan that takes into account the many sources and uses of your money, investment returns, interest rates, and your future goals (including how those goals might change over time).
The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations to any individual.