Do I need a financial plan?

I'll admit, I have a bias on this topic and with good reason. Most people don’t know what financial planning is or what it accomplishes. To build yourself a financial plan, you first need to go through the financial planning process. Going through the process is where the real value is found!!

I’m going to share several real world examples of mistakes I found and fixed for my clients that will save them an enormous amount of stress and money over time. This will be a 4 part series: Cash Flow/Budgeting, Insurance, Taxes, and Investments. For each section, I’ll go through The Mistake, The Risk, The Fix, The Savings and then provide a Real World Example. Hopefully, through these examples you can learn a little bit more about what the financial planning process can accomplish and a few red flags you can look for when going through your own finances.

#1 Cash Flow/Budgeting

What am I talking about? You earn a certain amount of money every month… What’s your monthly take home pay? How much of it are you spending? How much are you saving? How much are you spending in various categories and how does that stack up against your peers?

There is a fine line between spending on current lifestyle and saving/investing for your future.

Being distinct on what you want to accomplish in your life makes this area more clear.

The mistake: Not having a budget or knowing where your money is going, spending too much on current lifestyle

The risk: Not having any money set aside for future large purchases, one off expenses, retirement, etc

The fix: Start a budget, Spend less (duh) ie. Save more to accomplish what you want.

The savings: This will add up to several hundred to thousands of dollars A MONTH! An extra thousand dollars a month not spent is $12k a year. Over 40 years that is $480,000. If that is invested in a standard portfolio (7%) that $1,000 a month can turn into $2.6 million dollars!

After saving $2.6m dollars you could use a 4% withdrawal rate to distribute $105k to yourself annually. Is that enough to live on?

An extreme real world example: In prepping a client for retirement we worked through their budget. I helped them realize that by reducing their monthly spending from $18,000 per month to $9,000 a month over the next 4-5 years. This will save them, their portfolio, and their estate $4,320,000 over a 40 year period. So that’s what they are doing.

As you can see, combing through your expenses, becoming aware of where your money is going, and creating a budget based off what you find gives you the power to accomplish great things! Next week I will cover common mistakes I regularly see on your insurances. Tune in!

Investing $1,000/month at a 7% interest rate over 40 years!