Creating Your Own Personal Financial Plan
December 5th 2007
By Mark Biller
© Sound Mind Investing
A question we’ve heard countless times over the years is “What’s the most common mistake people make when managing their finances?” Our answer: making spending and investment decisions apart from a personalized financial plan. No matter how good your investing choices are, if they’re made outside the framework of a larger plan, you’re inviting trouble. Read on to discover the main bases you’ll want to touch at each phase of life as you construct a solid financial plan of your own.
Imagine that you’re preparing to build your dream home. Over the years, you’ve accumulated scores of ideas that you’d like to see incorporated into it. Before construction begins, you sit down with your builder to review your design goals. You ask him how long before the blueprints will be ready, but to your surprise, he tells you he doesn’t work that way. Rather than planning everything ahead of time, he prefers to develop the design as he goes along. He’ll keep your ideas in mind, but “blueprints are so restricting,” he says—he wants to have the freedom to be spontaneously creative as the house is being built.
Most of us would be reluctant to hire a builder like that! When building a house, we recognize it’s a good thing to have a carefully considered blueprint for action before taking on a challenging task. In fact, the more important the project (e.g., having open heart surgery), the more emphasis we place on careful planning.
Unfortunately, too many people use the “we’ll work out the details as we go along” approach when it comes to one of the most important projects they’ll ever take on—building a secure financial future. Yet, in much the same way that we live in a physical home, we each “live” in a financial home as well, one that has been created by our past decisions. Just as our dream house could end up poorly designed due to a lack of planning, many people reach retirement and find their financial home isn’t what they’ve always hoped for. That’s usually what results from a lifetime of making financial decisions independent of a master blueprint. The good news is this doesn’t have to happen to you. Get 2007 off to a good start by setting aside time this month to create a personalized financial plan that’s designed to build the kind of future financial home you’ll enjoy
living in.
In a moment, we’ll look at typical planning situations for people at three various stages of life. But before we do, let’s examine two basics common to every financial plan. The first is the necessity of developing a clearly defined set of God-given goals. Clearly defined goals establish your financial priorities. In his book, Storm Shelter, Ron Blue lists the following five steps for setting good goals: List your goals, consolidate and refine them, prioritize them, make them measurable, and keep them visible. The monthly surplus established by your budget (which I’ll get to in a moment) is the wind in your sails, but your goals are the compass you navigate with. Set good goals and keep them in front of you—you’ll be surprised at how much more productive and focused you’ll feel as you start living with a clearer purpose.
The second common denominator of all good financial plans is a spending plan (i.e., budget). You may not like it, but it’s an absolutely essential tool for everyone who hasn’t yet received a seven figure inheritance. Without a spending plan, you can’t intelligently implement saving and investing strategies because you don’t know if you have any extra money to save or invest.
Even if you seem to have extra money left over each month, without a budget you won’t know if that money should be saved for those once-a-year items (such as insurance premiums and summer vacations) or if it truly represents a surplus. Also, it’s unlikely you’ll be in a position to give generously to God’s work if you don’t plan for it.
As you work through your goal-setting and spending plan, remember that this is a spiritual endeavor, not merely a mental one. Your personal financial goals and budget will reflect how you view and use money. Since, as Christians, we are managers rather than owners, it’s vital that you allow God to speak to you regarding your plans for His money. Married couples should absolutely make these planning decisions together, not just because it ensures “buy-in” from both parties, but because it establishes you as a team rather than opponents. One-half of marriages end in divorce, and 80% of those are due, in part, to money problems. Jointly establishing a financial plan may have farther reaching implications than you think.
While there are no “one-size-fits-all” financial plans, certain experiences are common to particular phases of life. As you read the following scenarios, don’t get discouraged if you feel “behind.” The point is not to provide benchmarks of how far along you should be, but rather to provide guardrails to keep you on track and to help you think through issues common to each phase. Your situation will probably differ somewhat from what’s here, so make sure to personalize these to your individual circumstances.
We will look at age groups specific needs in following articles.