Written by Hi, it’s Dre Griggs with Obsidian Wisdom. Today we’ll be discussing financial planning for beginners. When it comes to financial planning, we often think how difficult financial planning is, and so we don’t feel like getting started. The other thought that we have is, I don’t know if I have enough money or enough disposable income to really find value in hiring a financial planner on my own.
Financial planning for beginners
Even if you’re not a hundred percent sure that you need or want a financial planner. It doesn’t mean that you don’t need a financial plan in place. Keep in mind that there is a plan for every season and a process for every result. Make sure that you’re being intentional with your money and your time to make sure that you accomplish the ultimate goals that you have for yourself. We’re going to break down financial planning for beginners into four simple steps.
1. Know your numbers
Make sure you know exactly how much money you actually have coming in each month. To keep it simple, log into your checking account and you can see what is direct deposited each month. You take the amount of money you started with, and then you take the amount of money you have left over at the end of the month. That difference is how much you spent that month.
2. Create your budget
Decide how you want to allocate your budget each month. Your largest portion is allocated to your needs. For some, this can be as small as 50%, while others need to allocate 70-80% of their budget. Next, you’ll allocate a percentage of your budget to investments and savings. Your savings can be your emergency fund, passive income, retirement fund and nest egg. The remaining portion of your budget is your debt and philanthropy. Regardless of the size of your budget, it is always good to give a portion to help others.
50-30-20 & 70-20-10 budget
In this budget, 50% of your income is what goes towards your needs. 30% of your income goes towards your investments and =freedom fund. The remaining 20% goes towards your philanthropy and paying off your debt.
If you’ve read the Richest Man of Babylon, you will have 70% allocated towards your needs. This includes things like, food, housing, shelter, gas and and transportation. You have 20% for debt and 10% for philanthropy and your savings/investments.
Four freedom
The choice is yours, but successful financial planning for beginners has investments in your future, while removing past debt. I usually talk about this as the four freedoms. The first freedom is mindset freedom. That freedom is when you realize the system is designed to make lifelong employees from early education on. Where you fall into debt and must climb out of it. The second freedom is debt freedom. Once you climb out of the debt and free your mind and your money, you are on the path of financial freedom. The last step is generational freedom. In addition to you being free, you are passing on your wisdom to future generations. Creating generational freedom for your loved ones.
3. Reach for the stars
Number three on our list of financial planning for beginners is to set financial goals. It’s one thing to be able to get a debt. It is another thing to save money. And it’s something else completely different to decide what you want to do with your money.
Whether you want to talk about retirement or buying a home or going on trips and traveling. You want to write down the goals and dreams you have. I encourage you to write down at least 20 life and financial goals. Then you want to update this list on a regular basis. You want to think of places you want to go. People you want to meet. Things you want to do. People you want to do it with.
Your goals are the most important part of financial planning. When you’re tempted by something in the short term, you must have a long term anchor to pull you from that temptation. That is where most people are failing in financial planning. They have no idea what they want to do with the money, so everything today seems like a good way to spend it. When you have the goals and you write down exactly what you want to do with your money, it changes things. Where now you’re choosing between spending today or spending on the family trip Hawaii or Jamaica.
The Wisdometric Framework
We talk about the benefit of goals in the Wisdometric Framework. The benefits of understanding your why are profound. What are you going to do with your money? How does this excite you? In what way will your life change? What are the experiences that will bring a smile to your face when you look back at life? The answer to these questions will help you decide what to do with your money.
4. Take care of your loved ones
Make sure that you dot your i’s and cross your t’s. What I mean is you want to make sure your life insurance and estate are set. We’re not just talking about choosing a number, but understanding what is it you want your life insurance to do. Do you want to make sure your kids go to college? Or are you interested in making sure your family can stay in the same house? Others are focused on covering the funeral or paying off debt. You simply want to be intentional with your plan and reasonable with your expectations. That’s also true for your disability and property & casualty insurance. You need to make sure you understand what is the purpose of this insurance. Then you’ll determine how much you need.
Insurance
If you’re trying to replace someone’s life, that’s usually going to be at least a million dollars. If you’ve ever seen where someone has a wrongful death lawsuit. They often get paid a million dollars. How did they decide that number you ask? Well, if you take someone who makes $50,000 per year and assume they will have worked for another 30 years. If you multiply the two, you’ll have $1,500,000.
That is how much someone’s (economic) life is worth. The two most common ways to determine the right amount of life insurance is to calculate their economic value or the expenses you want to pay off. I’ve seen some people simplify it where they just multiply their annual income times it by 10. Which is fine as well. Financial planning for beginners doesn’t require you to be exact, just intentional in your approach. The majority of people are underinsured where when someone passes, it’s not really covering anything.
Estate
Make sure you have a will in place. Whether you do that online or with a probate attorney, the fee is very reasonable. You don’t want your family fighting and forging documents in court. As much as it can depend on you, you want to have your house in order. This includes passing things onto the next generation.
Final thoughts
You don’t want to just focus on the financial aspect of financial planning. Make sure your plan includes your goals, values and passions. Financial planning for beginners is simple, but it is still comprehensive. when creating your financial plan.
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