Creating A Financial Plan For Dummies

Financial Planning Made Easy

Do you live paycheck to paycheck? Do you charge a couple of grocery store bills on your credit card simply because you ran out of money before you get paid. You hate financial planning, you have never been good at it, you suck at making a budget and why bother, you will never be rich.

If the above said pertains to you, then you

  • either do not have any retirement plan whatsoever or
  • your company offers 401K, but you can't contribute to it anyway
  • know that you have a 401K plan somewhere, but don't even know what funds is vested in
  • you are all of the above

Simply said, you neither have any savings nor an emergency fund, let alone you think or ever thought about your retirement.

Not to worry my dear friend, the fact that you're reading this article already shows that you have realized your not so good with your financial situation and are ready to deal with it. And this is a HUGE STEP IN THE RIGHT DIRECTION.

Let's not get scared, close the browser and open your fantasy football or a favorite news site. Just finish this article, I promise it's not that bad.

I have divided your financial planning strategy into three steps, following them will not involve a budget, 'cause let's face it, you are not one of these folks to keep all these receipts and plug them into an excel spreadsheet every night.

I know, I am not!

BUT I PAY MYSELF THREE TIMES A MONTH

Pay yourself first, then spend everything else if you like. The trick is that you are going to pay yourself three times a month.

Usually you get paid twice a month, so you can set these three different SELF PAYS to go out on the 1st and the 15th for example. The 1st of the month is when most big bills are due like mortgage or rent, so set the lowest payment to go out then.

Two of your SELF PAYS should go away from your hands, this means you will not have immediate access to this money. It's still your money, just that you can't buy that screaming flat screen TV deal at Best Buy. You probably already have one that you are still paying off.


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Pay YOURSELF First Time- Set Up An Emergency Fund

What is an emergency fund?

Emergency fund is money you will need in case you get laid off or fired from work. Best case scenario is to have 6 months worth of living expenses, but in your case you can just set up a goal to save for at least 3.

How do you know how much to save?

This is a simple math here. For example, if your total net income is $3,000 per month then you need to work on saving $9,000 to cover 3 months worth of expenses while you are looking for another job. You can do the math if you want to save for 6 months.

Now, don't be freaking out here, how can you ever save $9,000 dollars, you don't even have money for Christmas presents.

Emergency fund is not something that we build over couple of months but rather several years.

Let's say you put $50 a month for 5 years makes $3,000. If you put $100 it will take you half the time.

Don't get discouraged by how long it takes to save this, start doing it. Just so that you know, I am in your boat and am only in my second month of emergency fund savings.


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Pay YOURSELF Second Time-Open a Savings Account

Most US Banks offer a free savings account with a regular monthly installments or a minimum balance. You can start with the minimum of $25 per month scheduled transfer from your checking to your savings account. $25 a month may not be a lot to save as it only makes $300 a year but it is a start. As you feel more comfortable you can gradualy increase this amount .

Again you need to set this as a automated scheduled deposit. Do not fall into the trap thinking you will send money to the savings at the end of the month, you can even send more, Gosh, now that you are looking at your bills you may even end up with 300 extra cash. Chances are, since you are reading this article, you will not.

You can use your savings to pay an unexpected bill, car repair, family vacation, presents.

Saved money can also tie you over till the next paycheck so that you don't have to charge these living expenses on a credit card.

Do not ask the bank to issue you a debit card from your savings account. You will have this option when you open your savings, the trick here again is not to depend on this money.

old people playing music for money
old people playing music for money | Source

Last, Pay YOUSELF Third Time-Put Money Away For Retirement

Are you one of these very few and lucky people who work for a company that has a pension plan?

Chances are - you are not.

Remember your dream vacations you never got a chance to go on because you had a kid or started a new job or could not take enough time off? Believe me, if you don't start putting away for retirement then you'll never get a chance to go anywhere! The thought of retirement and not having to drag yourself to a job everyday is something that every person dreams of, but few actually get to that point. And that is because most people have a hard time putting money away that will someday support them when they walk away from their career.

The trick is you have to start NOW! Never underestimate the power of compound interest, which I've illustrated below. The graph assumes a yearly investment of $1,200 minus 5 % commission with a modest rate of return of 3.50 %. After 20 years, you would have invested $24,000, yet the account value will have grown to $33,367 for a net gain of $9,367. Of course that isn't enough to retire on, but it shows how the interest gained continues to grow and build on itself. It is doing work for you.

So.....WHAT ARE YOU WAITING FOR!! Get saving and start planning your future.

WHO Do You Send YOUR Money To?

Now comes the million dollar question, where should you send your emergency and retirement money to?

Obviously the savings account is something you need access fairly fast. Your bank can offer you this option.

The emergency fund and retirement account is a bit more tricky and you will need a professional help.

A FINANCIAL ADVISOR is a person who can invest your money for retirement, and keep your emergency fund savings safe. A Financial Advisor will charge you a commission for investing your money, trust me his/her commissions are all worth it.

A Financial Advisor is trained to invest your money in stocks, mutual funds and bonds, he/she can create a portfolio that would best match your age and needs.

Find a financial advisor from a firm that focuses solely on individual investors and small-business owners, and it's NOT publicly traded.

Edward Jones Investments for example is the firm with "Highest in Investor Satisfaction" by J.D. Power and Associates in 2002, 2005, 2006, 2007, 2009, and 2010.

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Pay yourself first, build the three accounts described above, build them slowly and gradually over time, help people in need when you can, and GOSH - treat yourself with this $4.50 Starbucks Mocha with Whipped Cream at the end of the month if you have any money left.

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