Financial Planning 101: Essential Tips for Beginners
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Setting Financial Planning Goals
Financial planning is unique to each person because everyone has different priorities in life. While some may gain enjoyment for seeing how much wealth they can attain, many people aren't focused on making the list of wealthiest individuals: after all, the person who dies with the most toys is still dead. "You need to focus on goals that will actually make you happy, and practice conscious spending around those goals," says Alan Moore, a Certified Financial Planner practicing in Milwaukee, Wisconsin. "We know that owning a bigger home, new car, and a big screen TV don't increase happiness, yet that's where we tend to spend our money. Instead, try to focus spending on experiences, building a community, giving back, etc. That's how you will build satisfaction in your life."
Tracking Your Spending
Before you can truly start planning for the future, you need to know how you're spending your money. "There is no need to start planning a budget until you know where the money is coming from and going, so gathering that information is the first step," advises Moore. At first, just worry about collecting the data. "You don't have to worry just yet about cutting back or making major changes," says Moore. "Just start gathering the information so you can see where you're at. Many times, adjustments will happen naturally when you realize where your money is being spent." Once you have a few months' worth of data, you can outline your various categories of spending to see how you want to move forward.
Building Your Budget
With your new data, you can group your expenses into fixed costs and variable costs. Fixed costs include expenses like your rent or mortgage payment, cell phone, gym membership, and insurance. Though these are often more difficult to change, Moore encourages clients to examine them anyway. "These are usually the most difficult to adjust (like moving for lower rent) but can have the largest impact since they are the biggest line items in the budget," he says. Once you've looked at your fixed costs, look at your variable expenses, like eating out, entertainment, and gas. "I always recommend starting with fixed expenses however," says Moore, "since making changes there doesn't hurt nearly as bad as adjusting the eating out budget! It is less painful to refinance your mortgage for a lower monthly payment than to eat out less."
Looking Beyond Cutting Expenses
When you're just starting to plan your financial future, it's easy to fall into the trap of thinking the only way to balance your budget is to cut back on expenses. Of course, there may be times when you have to cut back in certain areas to reach your goals. However, Moore reminds readers "that increasing income is just as important (and probably more effective) than decreasing expenses, so don't forget about that side of the budget!"