Basic Financial Planning for Beginners

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Here’s a tale of two financial situations. 

First, there’s Riley, who is pushing 60 years old. Riley is still working for an employer and trying to save up as much as possible in hopes of retiring someday. Sadly, Riley has a long way to go.

Then there’s Jaime, who’s 40. Jaime is a lot younger than Riley. But thanks to solid financial planning, they are already in a position to retire and live a life of abundance. 

Everyone should strive to be like Jaime. Keep reading to learn about basic financial planning so you can make it happen.

How to get started with financial planning 

  1. Form a budget
  2. Stop overspending
  3. Get out of debt ASAP
  4. Start saving
  5. Invest in a brokerage account
  6. Form a retirement plan
  7. Bring in more income
  8. Minimize taxes
  9. Get life insurance while you’re young

Disclaimer: Every financial consumer is different; what works for one person might not work at all for another. Still, here are some common things to consider as you start this process. 

1. Form a budget 

There is absolutely no shame in forming a budget. In fact, this is something even many multi-millionaires do. 

Forming a budget is simply a way of acknowledging your limitations and taking active measures to protect your wealth and improve your financial health

By forming a budget, you can allocate money to the right areas while avoiding waste. In fact, it’s one of the best financial decisions you can make. 

You can form a budget on your own. Or you can use an app like You Need a Budget (YNAB).

Budgeting is easy, important, and—spoiler alert—you may even find it fun. 

Learn more:

2. Stop overspending 

There’s a difference between forming a budget and sticking to it. If you really want to get ahead in your finances, you need to control your spending. This is critical for long-term financial success.

Check out the Trim app, which is a budgeting solution that identifies areas of financial waste and takes action to reduce expenses. Trim can cancel subscriptions and negotiate with vendors to lower your bills.

Take my word for it: This is one of the most important preliminary things you can do before moving forward with financial planning.

3. Get out of debt ASAP

Once your budget is in order and you can see how much you have to work with in terms of capital, the next step is to get out of debt. 

Figure out exactly how much you can put towards debt payments each month and double down on your efforts to get out of the hole. 

Start by tackling the credit card or loan with the highest interest rate first. Put as much as you can towards paying down that debt. This way, you can stop making high monthly payments and start putting more money aside for growth.

4. Start saving 

As you pay down debt, you should also put money aside into high-interest-bearing savings accounts. Open a high-yield savings account (HYSA) or a money market account with a high interest rate. 

For the best results, avoid using traditional banks for this purpose, as they don’t offer great returns on savings accounts. 

That said, you shouldn’t park money in these types of accounts to just accrue interest. Instead, you should do it to have liquid cash available so that you can buy things when you need to without having to liquidate any investments. 

Just remember that savings accounts are bound by Regulation D, which limits accounts to six withdrawals per billing cycle. The last thing you want is to have all your money tied up in savings when you need to make eight withdrawals in a single month, for example.

Your goal should be to save an emergency fund with enough money for at least six months worth of emergency expenses.

5. Invest in a brokerage account

It’s also a good idea to open a brokerage account through a provider like Fidelity or TD Ameritrade

By doing so, you’ll gain access to the stock market so you can buy stocks, bonds, exchange-traded funds (ETFs), index funds, real estate investment trusts (REITs), and mutual funds.

Just keep in mind that any gains or dividends you make in a brokerage account is taxable income. When tax time rolls around, you’ll have to pay taxes on capital gains and dividend yields.

The reason it makes sense to invest in a brokerage account is that your money won’t be tied up. Even though you have to pay taxes and potentially exit fees when trading certain funds, the money will be accessible at any time.

Before you start investing, you should also take a look at your risk tolerance to see how much risk you can take with your investments. Most young investors have more extreme risk tolerance for the simple fact that they have more time to make up for investment losses. 

Learn more:

6. Form a retirement plan

Regardless of when you intend to retire, you’ll still need to plan ahead for your golden years. For this reason, it’s a good idea to use tax-friendly retirement funds like individual retirement accounts (IRAs) and 401(k)s. Social Security probably won’t be enough to float you during retirement. 

These types of accounts can offer access to tax-free or tax-deferred growth, depending on the type of account you open. Certain health savings accounts and life insurance policies also provide tax-efficient retirement benefits.

Whatever you do, stop delaying putting off retirement planning. The sooner you start planning for retirement, the better off you’ll be down the line. 

7. Bring in more income 

Most people go to college, get a job with an entry-level salary, and steadily climb the ladder, getting pay raises in increments.

Consider shattering this mold and bringing in more money on the side through a side hustle if you’re able to do so. 

Keep in mind that not all jobs allow for side hustles. But many do! And if you’re able to pick one up, you could potentially double or even triple your salary. 

Think about your core skills and some additional ones you could develop that could help generate more money. The harder you work, the more you can save and invest… and the faster you can reach financial freedom and retire.

8. Minimize taxes 

One of the major keys to financial success is to minimize taxes. It’s critical to preserve your wealth as you make more money so that you give less to the government. 

There are many ways to minimize taxes. For example, investing in certain retirement accounts, buying real estate, and claiming deductions like home office expenses can potentially lower the amount of taxable income you have to report.

Consider talking to a tax advisor about ways to minimize your taxes. 

9. Get life insurance while you’re young 

If you hope to start a family someday, you’re probably going to want life insurance so they’re taken care of in the event of your untimely demise. 

The problem is that people often wait too long to get life insurance, which leads to higher premiums. To avoid this fate, get life insurance while you’re still young and in good health so you can get the best rates possible. 

Talk to a life insurance agent and consider looking into a plan that can provide potential retirement benefits in addition to death benefits. 

Why you need financial planning

It’s safe to say that your finances are pretty important. It’s not something you want to brush off or mismanage. Just like your health, there are consequences to neglecting your cash flow and ignoring retirement savings. 

Yet, finance isn’t the giant mystery it often seems. It simply requires some basic attention and ongoing management. 

You don’t have to obsess over finance in life to achieve your long-term goals, boost your credit score, and increase your net worth. That said, it does require some level of commitment if you want to reach important financial goals—like getting out of credit card debt, paying off student loans, starting a family, buying a house, and retiring one day. 

Some of these things may seem eons away. However, life comes at you quickly. The sooner you start planning for these goals and life events, the easier you’ll have it down the line. 

Take a look at any successful individual, and you’re bound to see they engage in strong financial planning and have taken the crucial steps needed to secure their financial future. 

Learn more:

Tips for reaching your financial goals 

Have discipline 

If you want to reach your financial goals, you need to have discipline. It’s very easy to stray from the course and start making poor financial choices. This tends to happen as people get older and start making more money. 

Try to live a frugal lifestyle as you bring in more cash. Put as much aside for growth as possible and spend less. If you do this while you’re young, life can get much easier as you get older. 

Don’t follow the pack 

The fact is that most people are bad at managing money. There is also a lot of misinformation floating around about financial management.

One key to maintaining your financial plan is to have a strong nonsense filter and do your own thing. Follow your own path, and you’ll be better off in the long run.

Your friends may try to convince you to move to a big city when you’re young, and TV commercials might make it seem reasonable to finance a brand new car. The better option may be to get a house in an area with a low cost of living and start building equity. Or, instead of partying at night, pick up a side hustle and work from the comfort of your own home. 

When you’re in your twenties, it’s tempting to think the party will never end. Just remember that you don’t want to be the last one in your friend group to grow up and settle down. It’s never too early to start thinking about your financial future.

Set up automated deposits

One way to take the burden out of saving and investing is to set up automatic deposits.

Rather than moving funds from one account to another manually, automatic deposits add money to your investment and savings accounts without even thinking about it.

Over time, the cash can really add up.

Frequently Asked Questions

How can I improve my personal finances?

The best way to improve your personal finances is to stick to a plan.

Put together a robust plan that includes saving, investing, reducing debt, and planning for retirement, to name just a few items.

As with most things, the most important part of financial management is just showing up. Make it a point to prioritize and care about how you manage money, and the rest should fall into place as you learn different strategies.

What is estate planning?

Estate planning involves determining what will happen to your assets at your time of death. This is something you absolutely want to talk to an attorney about. Doing this on your own could result in catastrophic consequences for your loved ones when you’re not there to guide them through the process.

Just think about what would happen if you leave a will but don’t execute it properly. 

There’s no better time than now to get your estate plan straightened out. 

Do I need a financial advisor?

It’s not a bad idea to use a financial advisor to get yourself on track. 

However, you should try to learn the ins and outs of finance to the point where you can manage things on your own. Financial responsibility is something everyone should prioritize. 

The Bottom Line

The best financial planning advice I can give you is to form a roadmap that leads to your short-term and long-term goals. 

It doesn’t have to be perfect, and you’re welcome to change your plan over time. But the bottom line is that you are more likely to improve your financial situation and achieve financial freedom when you have a plan. Good luck!

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