Financial Planning 101: Starting to Save Begins With Values
Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it. —Albert Einstein
Whether you’re moving cities, paying off student loans, dealing with the death of a loved one, or selling your business, financial planning is helpful at all stages of life to help optimize where your money goes, reduce stress, and make progress on your goals.
The key to successful financial planning is aligning these three critical areas: goals, values, and actions. Paramount is defining what your values are, i.e. what’s most important to you and your family. One needs to define principles and purpose first, and then establish goals that align with these personal values. As time goes on, revisiting whether your financial behaviors and actions (saving, investing, spending, etc.) align with your goals and values is key to successful financial planning.
Values provide the north star. They could range anywhere from independence, power, education, philanthropy, adventure, community, creativity, and even fairness. We recommend blocking out some time to write down all the values that are important to you. Once you’ve done that, whittle them down to your top 20, then your top 10, and then to your top 5. Once you establish your main values, assess where you are in life with you current financial situation with income, expenses, savings, assets, and debt. From there, develop a realistic budget. The goal of effective budgeting is to know where your money is going before it comes in. This helps keep you in check going forward.
With a real budget in place, it’s time to see what it will take to accomplish your goals. You’ll want to estimate the cost of each goal and its expected timing, and then make cash flow projections that take into account variables such as inflation, investment returns, and annual savings. The goal of these projections is to answer questions about how you can achieve your goals and the trade-offs between these goals. For example, you’ll want to know how much you’ll have to save per month to achieve all your goals and at what age you can retire. You might discover that if you spend $500 less per month you can retire two years earlier, or that if you buy a home that’s $100,000 more it might mean working 3 more years than expected.
Manage debt. Debt is a tremendous tool that can potentially help you achieve your goals faster, but can also sow the seeds of financial ruin. Tread carefully when it comes to taking on debt. Aside from a thorough financial risk assessment of the amount and features of each potential debt, it’s recommended that debt be reviewed in the context of your values and goals.
Again, always return to your values to guide your financial freedom, and future. The impact of planning is immense.
David Flores Wilson, CFP®, CFA, is a New York City-based CERTIFIED FINANCIAL PLANNER™ Practitioner & Managing Partner at Sincerus Advisory. Click here to schedule a time to speak with us.
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