In this post I’ll be covering a variety of financial principles and subjects that come up when seeking financial planning help. See links for additional information.
Due to the recent recession in the world economy many people are starting to pay closer attention to their personal finances. It’s always a smart thing to plan in advanced, but unfortunately many people have had to learn this the hard way.
The best advice I can give a person who is trying to improve their “financial IQ” is to continue reading blogs & articles like this one. Buy as many books as you can on financial planning for beginners and immerse yourself in it. Get to know different financial strategies and financial terms. Whether you are seeking financial planning help from an experienced firm or whether you’re trying to do it yourself, you absolutely need to know some of the basic concepts.
Here are some basic financial planning principles and terms that you need to know. Think of this as a brief crash-course.
Assessing Your Spending Habits
This is the first and most obvious step a person needs to take. Without doing this you will lack the information necessary to create a financial plan that is adequate to your financial situation. It’s part of the map that is necessary to achieve your goals. It involves listing each and every single expense you have in a given month. Include everything and anything. You’ll have necessities (things you need to survive), luxuries (things that make life more comfortable), and certain expenses that seem to fall in-between.
When giving financial planning help I advise most of people to write an initial list and then to keep track of every single penny they spend for 30 days. This will give you an idea of unexpected spending and those times you “splurge” (like stopping in a convenience store for a drink or pack of gum). It’s a good idea to carry around a pocket sized notebook too so you can keep track of how much you spend each day. The people who write down an expense as soon as it happens tend to have a more accurate picture of their expenses at the end of the month, compared to someone who sits down and tries to write everything down at the end of the day.
By taking the time to assess your spending habits you are preparing yourself for the next step, which is budgeting.
Budgeting your expenses
This is the second and one of the most important steps. Everyone should have a solid budget to rely on. Creating a budget is a very simple process. In a nutshell, it’s monitoring and limiting your expenses so you spend less money than you earn. You do this by taking the list you made when assessing your spending habits and either completely eliminating an expense (like canceling a gym membership you don’t use) or cutting back and limiting an expense (like spending $50 less on food each month).
If you want a more in depth overview of how to create a personal budget than check out the first part of An Idiot’s Guide to Creating a Personal Financial Plan. This guide was written specifically for beginners.
Creating (and sticking to) a budget is the hardest part for most individuals. To give yourself motivation to stick to your budget you need to have personal financial goals. This is the next concept we will be over viewing.
Determining Your Financial Goals
Each person is going to have different goals they want to achieve, and some are more ambitious than others. If you’re not sure what you want to achieve then just ask yourself what kind of life you want to live. What kind of house are you living in? What kind of vacations do you take? Whatever it looks like draw inspiration from it and form them into financial goals.
Also, make sure the goals you set are realistic, you can always change them later. For example don’t aim to be a billionaire if you’re not even a millionaire. Aim to be a millionaire first and then aim to be a billionaire. Tip: Set easy goals you can achieve within a 3 to 6 months. Once you see results they will give you the motivation you need to set bigger financial goals.
I discussed this briefly in my guide for senior financial planning. For a more in depth over view you might want to read that post (whether you are a senior citizen or not, same principles).
6 Month Savings
Most experts recommend having at least 6 months of savings in case you lose your main source of income. To figure out the amount you should save multiply your monthly expenses by 6. For many people it takes awhile to save up to this amount, even if you get a temporary second job – it’s worth having.
This is basic financial security. If you lose your job you will have 6 months to find a new one, or a new source of income. I’ll be writing an article that goes more in depth on the subject of saving soon.
Hopefully this has provided you with enough basic financial planning help to get you started. I’ll be covering more topics soon.