Previous Post: Personal Finance Basics Part 1 – The Basics of the Basics
Personal Finance Basics Part 2 – Enhancing Your Basic Plan
In this series, I’m discussing the main ingredients of a personal financial plan – this will be a high level introduction to the topics that most people should consider when they first get started thinking about personal finances. This is the second post in the series.
The previous post discussed the very basic necessities for a financial plan. Today I am discussing the next steps to consider. To review, here are the basics:
- Earn some money
- Give some of it away
- Spend less than you earn
- Protect yourself
- Create an Emergency Fund
After taking care of the first 5 steps, I would recommend the following:
6. Create a vision, goals, and a plan. Creating a financial plan is about preparing yourself to reach a target that is typically a long way off. In order to be able to plan properly to reach that target, you need to know what the target is. To know what the target is, you need to have goals that guide you to the target. So, the first thing to do is to craft the vision of what you want your financial life to look like in X years. I think this is an important step that is often overlooked.
Money is useful only when spending it. Seriously, what good is it to save up millions of dollars if it just sits in the bank forever. In order to avoid the extremes of wasteful consumption on one side and hoarding on the other, we need a specific target that will help us to know if we are on track (and when to stop when we get there). So, this is the time to dream about what you want your life to look like…don’t be shy here, remember that if your plan matches up with God’s will, you’ll get there.
7. Get out of debt (or most of it). I know what you’re thinking – the name of your blog is BorrowFromNone.com and getting out of debt is only step 7! Well, let’s not quibble; you made it all the way to #7 so let’s just go with it. Once you have a vision and some goals, you will undoubtedly be fired up and motivated to start working towards your dreams! The problem may be that you don’t have the financial resources to accomplish them. For most of us, before we can start building our own wealth we need to stop building others’ wealth …namely credit card companies and banks. Close your eyes and imagine this scenario with me: How much wealth could you build and how quickly could you build it if you didn’t have any credit card payments or car loans or home equity loans or, dare I say it, mortgage payments?
A caveat here – if you decided to maintain a lower than desired emergency fund in order to devote more of your money to getting out of debt, once that debt is gone, you will now want to replenish the emergency fund to a comfortable level.
8. Save for retirement. Now that you’ve gotten out of debt and have increased your cash flow, we can apply that cash to the Big Goals! I feel that retirement savings should come first even before college savings if you have kids. Remember, your kid can get grants, scholarships, work studies, and even student loans if absolutely necessary (psst, don’t tell the BorrowFromNone police that I just said that), but there are no scholarships for retirement. I’m sure Junior would understand having to work a bit to foot some of the bill for a college education instead of having to completely support you in your retirement.
As an aside, some people would say that you should not wait until you get out of debt before saving for retirement and, for the most part, I agree. If you can get rid of crazy high interest balances in a relatively short period of time, then maybe you want to focus your energy on that before ramping up your retirement savings. But for larger loans that will take a while to pay back, it is probably not a good idea to delay retirement savings.
9a. Save for big expenses (mid-term savings and college expenses).
9b. Get rid of the rest of your debt. I put these two down as the same number because they are so interrelated. When saving for big expenses, starting earlier is always better. At the same time, remember our visualization experiment from earlier – If you get rid of the rest of your debt, you’ll be able to save at a much higher rate. So do them both or do whichever makes you feel more comfortable.
10. Life life abundantly! This is the target that you created back a few steps earlier. You’ve earned money, gave some away, and saved a lot. Now you have achieved a financial freedom such as that termed the "crossover point" in the book Your Money or Your Life. You are no longer required to go to work on Monday morning – you don’t need the money. You can do whatever you want. Of course, you already know that the Biblical description of retirement is not exactly playing golf every day (more on that in a future post)…but you could technically do that if you wanted to.
But what if you wanted to do something else, something you’ve always dreamed about doing, something exceptionally fulfilling – now you can do that! (I am getting excited just thinking about it while typing this – I’m starting to type too fast and having to do a lot of correcting)
I [Jesus] came that they may have life, and have it abundantly. John 10:10 (NASB)
So what does your abundant life look like? You can take that job you’ve always dreamed of but couldn’t afford when you had credit card and car loan payments. You can work for a lower salary at a non-profit. You can volunteer at your church full-time. You now have the freedom to do exactly what you’ve dreamed of, if it is not already your current job (and if it is, good for you!). This is the point of all the financial planning – not to hoard money and be rich but to free yourself to follow your dreams and fully use your spiritual gifts.
I hope this has informed and maybe even inspired you (if not, well, it inspired me so I guess it was still worth writing!) to get on the right financial track. In the coming days I will go into more detail on each of the steps. So, which steps did I miss and which did I get out of order?
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4 Responses to “Personal Finance Basics Part 2 – Enhancing Your Basic Plan”
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I would love it if you could help me to make up a saving plan i waste a lot of money and i need hep please help me to get back on tract
Latoya – thanks for stopping by the site. There are a lot of great ideas out there for saving money. The best advice is probably “save first” – just put some money into your savings account (no matter how little) every month and get into the habit of saving. Of course, that is sometimes easier said than done and if you want to create an effective savings plan, you really need to look at your overall budget as well as your values and goals.
I’m planning on doing some posts in the near future on all of these topics. Please check back for them.
If you can’t wait that long, start by checking out these other great posts:
16 Ways to Save Money
15 Ways to Cut Your Expenses
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