Personal Financial Planning: Financial Freedom

People usually fear money management and personal financial planning, often putting it off. However there are several easy steps that you can take to best take advantage of your cash flow for your future and present!

A person can even develop another venture or source of income with strategy personal financial planning. Join TRADEPRO Academy as we go through some tips and tricks for your financial freedom through personal financial planning!

your financial freedom through personal financial planning!

Don’t be scared of the opportunity, don’t be scared of money management! There are a few basic steps that one should take and consider when developing their personal financial plan.

Personal Financial Planning: Goals

The first thing anyone should do before they attempt anything is set a list of defined goals. What do you want to accomplish financially? Starting from short-term to long-term.

What do you want your money to do? What do you want your finances to do? That has to be established before you can start saving, paying off debt or buying things. This is the simplest yet often forgotten step.

Some examples may be, go on vacation this year, save for a down payment within the next 5 years, or more long-term save for your child’s education in 15 years.

Then break those goals down. How much money do you need for that vacation, when will you need this money by? What about that downpayment and what are some possible ways to save for it? Do you have a child that you want to see in University?

As any business goes, personal finances play off the defined goal rule. You have to have a target so you can devise a plan of attack. Once the goals are laid out you can work through the nitty gritty detail on how you plan on achieving said goals.

Personal Financial Planning: Budgeting

Next up is budgeting for that plan! After you’ve set your goals, you have to budget in order to realize them. The goal during the budgeting process is to create a cash flow surplus, because you will need money to reach your goals.

At the core of budgeting, people see how much money they spend each month (expenses), and compare that to how much money they make each month (income). This is where multiple streams of income come into play!

When comparing your expenses and income you will either come to a deficit or a surplus, hopefully, a surplus. This helps people pinpoint the higher expenses and the unnecessary expenses in their lives, expenses they can potentially cut.

Remember, you will have to make changes if you want a money surplus!

Let’s take the situation below as an example.

Assumes After Tax Income

The above assumes that our mystery person has a surplus of $235 a month that he may put towards his goals, whatever they may be. That leaves him with $2,820/ year of surplus income to meet his goals. Alternatively, if he were to earn $1,000 less a month, he would be in a $765 deficit. In which he would have to manage his expenses.

A very important part of the budgeting process is estimating and considering taxes. You will have to pay taxes at some point and it’s best to have an estimate in mind and work towards having that money ready when the tax season rolls around.

Personal Financial Planning: Managing Expenses-Surplus or Deficit?

The next step, after budgeting, is to manage your expenses. After you have a budget set up you will know where your money is, where it’s going and this will give you the opportunity to manipulate your finances to create a surplus from a deficit or even a larger surplus.

This is done by prioritizing your expenses, obviously keeping the most important ones and getting rid of the unnecessary ones. There are levels to the importance of expenses, categorizing them from dire to not important at all. Between those two extremes, you can come up with several categories to best redirect your cash flow. We will be dividing the categories as follows: non-negotiable, important, and discretionary.

Within the non-negotiable category, using the example above we have mortgage payments, utilities, insurance, and other debt. If taxes were included in the above example they would be in this category.

There are a lot of variables one should consider when going through the categorization of their expenses, and they depend on personal needs. In the important category, we have food, cell phone, car expenses. Some may include clothing if it needed to incur an income. Just as car expenses and cell phone can be included in the discretionary category, they may not be necessary to incur said income.

Lastly, in the discretionary category, we can include entertainment. This category can theoretically be completely eliminated without having an adverse effect on the persons life or ability to earn income.

Reducing some of the discretionary expenses and if so some of the important expenses can leave you with a surplus in monthly cash flow to reach your goals. Take the following as an example.

Reductions made in expenses

We were able to reduce three expenses after deliberation. The most obvious was a large reduction in entertainment, saving $250 a month there. The next was from the “important expense” category, clothing down $150 a month and food down $100 a month. Maybe you decided to skip the lobster for a few months. Increasing total net surplus to $735, a $500 increase. Or an extra $6,000 a year. This money can go straight to your goals!

Personal Financial Planning: What’s important for you?

The ball lies in your court, what to prioritize? Debt repayment, emergency funds or something else? It depends on your specific life circumstances.

A recent CNBC article suggests that 60% of Americans would not be able to cover an unexpected $1,000 expense, while many live paycheck to paycheck. Let alone the ever growing debt that individual Americans are accumulating. So how will one save for retirement, not to even mention their estate?

You would have to weigh out each option and see how much it affects your day to day or ability to earn income.

If you have layers and layers of debt, it will be near impossible to have a surplus in cash flow to be able to reach your financial planning goals, so that could be a good start.

On the other hand, it is advised that you have three to six months of savings to cover your expenses in case of emergency, but this would be impossible if you’re level of debt was way too large.

Alternatively, you can chip away at both slowly to meet both necessities.

How do you tackle debt? Consider Dave Ramsey’s Snowball analogy. Which describes working at the smaller debts to the largest debts. First, you get rid of whatever small debt you have that would free up monthly cash flow. The next step is to tackle the second small debt you have and so on.

Financial Planning: So what are your saving going towards?

Assuming that you’ve done all you can and you have been able to come up with a monthly surplus, where should that money now go? Again, depends on your current circumstance! Where are you in life, early stages, middle, late etc?

Let’s start from the bottom to the top, with the early stages of earning and early adulthood. Moving along all the way to retirement. We’ll divide the stages into, “Early Earning”, “Mature Earnings” and “Retirement” as illustrated below.

Early Earnings

In the early stages, earnings will be low, while debt is expected to be high. That may not always be the case but this is the average life cycle of someone just entering the workforce. There may not be much room for saving or a surplus. The tactical decision, if you are in this situation would be to work on paying off the smaller debts, then saving the rest. The remaining surplus whatever it may be will most likely go to other expenses. At this point, many should consider insurance and paying premiums for unforeseen circumstances. This is not a topic many people enjoy, but the reality is that anything can happen at any time. Insurance is for highly unlikely events that could be very costly, so why not hedge your odds? Begin to think about saving some money for retirement!

Peak Earnings

Enter the middle stages of life, starting at about 35, the average person will start to earn more than they have debt. At the end of the middle stages, a person will have reached their peak earnings. This is when the surplus in monthly cash flow is the greatest and you have the most liberty with your free money. At the beginning of this stage, even throughout the later stages of the early earnings, it is wise to begin to save for your goals. Child’s education, retirement and more.

Retirement planning should begin to take focus during the early years of peak earnings if it has not begun during the early stages. Imagine you start saving just 7% of your salary a year starting at age 35, after having saved 3% from 25 to 35. Using compounded interest and a rate of return of 4.5% compounded semi-annually, assuming a salary of $70,000 you will have saved $4900 a year for 30 years till retirement. You will have saved $548,916.90 by age 65, although that might not seem like a lot, this is just one source of retirement income.

At this stage you should consider other goals, if you can diligently plan to put aside a certain amount each week for that goal, whether it’s $50 or $75 a week you can make a big step towards your goal. The difference between saving money weekly versus $200 each month, it is more likely that you do not miss any savings periods. Use this savings for investments, education or whatever your goal may be.

Retirement

Finally, we get into the retirement stage, this is when debt dwindles, to zero or near zero. At this point, with smart financial, you should have enough to enjoy your retirement. However, throughout this stage, you will notice that earnings tend to drop. No worries so do expenses!
With retirement comes estate planning, unfortunately. This is not a topic many welcome with open arms, but it is a reality. A will is a great place to start but estate planning is a whole other topic.

Final Thoughts.

Now that the TRADEPRO’s have outlined the basics of financial planning and the importance of managing your finances, its your turn to get out there and start setting goals and making your dreams come true!

Financial planning doesn’t end there, why not invest your surplus of monthly cash flow? Need help?

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The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.