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Financial Planning Basics

Financial planning includes budgeting, saving, retirement planning, getting out of debt, and insurance—no wonder it often feels overwhelming or impossible to figure out! Start with the basics to understand how each of these parts works together, and soon you’ll see how together they create a solid financial foundation for life.

Budget

Budgeting is the bedrock of all other financial planning concepts. To succeed at the later stages, like saving for retirement, you must first become a pro at your personal budget.

Your budget, or spending plan, is a road map to tell every dollar you earn what to do each month to reach your goals. Start by listing how much money you have coming in each month. Next, track how you’re spending all of it. Ideally, you want to have a surplus left over to save for retirement, build up your emergency fund, pay down debt, and/or apply to other financial goals.

If you’re overspending and relying on credit cards or are unable to save money each month, you can begin to change your habits. That’s what a budget does: it empowers you to make smarter decisions with your finances every day. It means being able to say “yes” to things that mean the most to you and “no” to mindless spending.

Cut expenses

With your budget, you'll have a clear understanding of where your money goes and where you can possibly trim expenses to reach your financial goals. But it’s entirely up to you how you achieve a surplus at the end of every month—maybe it’s cutting some expenses entirely, choosing cheaper options, borrowing instead of buying, using coupons, or getting a side gig to make more money.

Save for an emergency

Before you tackle debt or save for a home, you need to build up your emergency savings. This money should be held in a separate, easily accessible savings account. Start by saving $1,000 and then work toward enough to cover three to six months’ worth of living expenses (your budget will help you determine how much this is for you).

Use this money to cover unexpected expenses—a major car repair, emergency doctor bill or vet visit—outside of your usual budget. Being able to pay with money from your savings will prevent you from relying on high-interest credit cards.

Get out of debt

Once your initial $1,000 emergency fund is built, you can direct extra cash in your budget to paying off debt: student loans, credit cards, personal loans, car loan, etc.

When deciding which debt to pay off first—while still making minimum payments on all other debts—you have two choices: the snowball or the avalanche method. Using the snowball method, you pay off your smallest debts first for the psychological advantage of regular, small wins. As you pay off each loan, you roll that monthly payment into paying off the next biggest loan. Using the avalanche method, you pay off the debt with the highest interest rate first. In the long run, this will save you the most money, but it may take longer to feel the satisfaction of paying off a loan.

Once your debt is paid off, you should aim to pay off your credit card balance(s) in total each month and be able to pay cash or mostly cash for future car purchases to avoid taking on more debt.

Save for retirement

With fewer defined benefit plans offered by employers and the guarantee of Social Security on shaky ground, it’s more important than ever to plan and save for retirement. The most important step is to start. If you haven’t already, start with an amount your budget can support and aim to grow that amount as soon as possible. Take advantage of any matching program offered by your employer—that’s free money!

It can be costly to put off saving for retirement, even by a few years, because you’re losing out on the power of compound interest (interest earned on interest). The risks of not saving soon enough for retirement are: being forced to work longer into your twilight years, needing to rely on family for financial help, or falling into poverty later in life.

Insurance

Having adequate life, disability, healthcare, auto, and home insurance is how you protect your financial footing. Accidents and disasters can mean financial ruin if you’re not prepared with insurance and emergency savings.

Save for other goals

Once you make saving a habit by building your emergency fund, it will be easier to save for your kids’ college funds, long-term travel, a new car, a house, or really any other life goal.

Create a will

Believe it or not, financial planning includes creating a will and health-care directive, as well as naming beneficiaries and a financial power-of-attorney. These components will determine what happens to your estate when you pass away and how your loved ones will be cared for.

Without a will, your survivors will end up in probate court to sort and distribute your assets. A health-care directive names someone to make healthcare decisions for you if you’re unable to. Your financial power-of-attorney will be someone who can make financial decisions if you can’t.

Make time now to meet with a trusted attorney to establish these documents and roles. You can always make modifications later on.

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