Create Your Financial Plan - The Path to Financial Independence

Hey, what's up everyone and welcome to the School of Personal Finance. In this video, we're going to talk all about financial planning. I'm going to share with you how I describe being a financial planner to other people. I'm also going to go through all the components of creating your own financial plan and help you understand why it is so important that no matter how rich you are, how poor you are, how much that you have, the best thing that you could do for yourself is have your own financial plan. All right, let's get to it. I am a financial planner. I create financial plans for people and then I help guide them along their journey. You could hire me today if you want me to be your financial planner. The biggest part of being a financial planner is just helping people feel okay. I can't tell you how many times in my life I've met with people and they just don't feel okay. They feel like they've been doing things on their own and they've been doing a terrible job and that they're way behind and they're in a terrible situation. When you take a step back and you look at it from an impartial point of view, you end up being okay. It's not the end of the world. So a lot of times people just need to hear that and they need you to show them that and walk them through. They just need to put a plan together to get organized and then to go forward. All right, so let's talk about what a financial plan is. Now, I don't love the term financial plan. I think it's an intimidating term. It's really just like a life plan. It's where you want to go with your life. But a lot of it has to do with money. It's your roadmap. You have your starting point, which is your current situation. Then you have your ending points, which are your goals. And you have the little squiggly line that gets you from point A to point B. And it's what you're doing to get yourself there. So in a lot of circumstances, when I am doing a financial plan for somebody, there are changes. We have to change direction on that path a little bit so that you could get to point B a lot quicker than you would have otherwise. But it's a living, breathing document. It's always changing. So year in and year out, your financial plan is going to change depending on your circumstances. But there's no reason to be intimidated by having a financial plan or to feel bad if you're in a crappy situation starting out. Everybody's different. So the point of it is just to have one, to understand where you currently are, to have a clear vision of where you want to go, even if it changes 50 times by the time you get there, and then having a plan to get you there. But nobody goes in a straight line. It's just not the way that it works. And it's nothing that you should feel guilty about or stressed about. It's just the process of doing that is going to help you. So the first part, and it's probably the most important part, because this is where all future decisions are really based off of. So when I do a financial plan with somebody, the first thing that I do is I need to understand their current situation. And the way that we do that is through another stuffy term called your financial statements. And all that really means is like a net worth statement and a cashflow statement. And I've done videos on these in the past where you could follow step-by-step to complete yours. But all the net worth statement is, it's all the stuff you own, all of your assets, your house, your car, your retirement accounts, money you have in the bank, and then it's all your liabilities, everything that you owe to anybody. So it's not the monthly payments, it's the amount of money that you owe to people. So maybe you owe the bank for your mortgage, or you have a car loan, or student loans, or credit card debt. Whatever money you owe to people, those are your liabilities. So you take everything you own, all of your assets, you subtract out all the liabilities, and that is your net worth. And then the second statement is your cashflow statement. So for this, this is just your income, and then it's all your monthly expenses. And then hopefully at the end of the month, there is money left over where you have positive cash flow. But these statements, they do need to be filled out correctly. And then once they are, I could take a look at those statements, and I could tell so much about somebody just by looking at those two things. I could tell what mistakes you've made in your past, I could tell what's stressing you out currently, and I could also predict where you're going in the future. And now these statements, it's not something to be embarrassed about if you have credit card debt, or if you have a negative net worth, which many people do, especially right out of college. It's nothing to be ashamed of. It just gives us a starting point so that we could then start making decisions on what the best thing is for you to do going forward. But having accurate, up-to-date information, it's very important. And this is your financial snapshot. This is your current situation, all down really on two sheets of paper, and it gives so much information that you can then move forward with. And I highly recommend you go back and check out the videos that I did on creating your cashflow statement and creating your net worth statement. And that's the first thing that you should do. And then the second thing that I'll do with people is we'll have a discussion around goals, around what's important to you, around what keeps you up at night, what's stressing you out. And a lot of this information can be found in step one in those cashflow statements and net worth statements. So if you have a ton of credit card debt, obviously that's going to be a burden, and a very high prioritized goal is going to be to get you out of that debt. So step number two is talking about goals, short-term, mid-term, long-term, your dreams, your aspirations. And if you're doing this on your own, then you should write those things out. Like, I have a goal of retiring at 55 years old, or I have a goal of paying 100% of my kids' college tuition, or I have a goal of being debt-free in the next five years. Whatever it is, be very specific and write out your goals. And then the question becomes, is what you're currently doing, does it align to those goals? Or are you wasting money on things that really aren't that important to you, where you could maybe redirect that towards the things that you just wrote down are very important to you? And then the third part of your plan would be a debt repayment plan. So now if you don't have any bad debt, if your only debt is your mortgage, then you could skip this step. But if you have credit card debt, student loan debt, if you have a pile of debt that you need to get out of, then the third step should be putting a plan together for that. And I've done videos on that too. I just recently uploaded a video about how debt sucks and how to get out of it. You should go watch that video. It shows you how to do the debt snowball. That should be part of your financial plan. Implement the debt snowball and get out of debt. Remove the burden of that. And then the fourth component of a financial plan would be the investment management. So now this could be all different types of investment accounts, and it depends on you. So you can create another stuffy term, which is called an investment policy statement. And all that is, is where you write down what you're comfortable doing as far as investing goes. You could say, my investment portfolio is going to consist of index funds, low cost index funds in the stock market. I'm comfortable investing in that. I'm going to be investing for the long term. I'm not going to touch this money. I'm going to try to contribute $500 a month into my retirement accounts. I'm also going to have a Roth IRA where I'm investing in index funds. Maybe I'd like to diversify a little bit and own some gold coins or some silver coins or some cryptocurrency, whatever it may be, that is part of what you feel comfortable as your investment policy. Then when things start going crazy, when we have downturns in the market, you could always go back and review the investment policy statement that you did when you had a cool head, that you're going to continue to invest in downturns in the market. So basically it's just a piece of paper where you write down how you plan to invest in your future and the way that you see it all playing out so that it just keeps you grounded. And you could go back and review it in times of uncertainty. And most people, when they think of a financial advisor or a financial planner, they think that everything is around that investment plan piece of it. But that's really only one spoke in the wheel. That's only one piece of a full financial plan. It's an important piece and it is one that there is a lot of time spent on, but it is only one piece. And then the fifth component would be risk management or insurance. And now all insurance is, it's a transfer of risk. So when there is a risk that is too big for you to be able to handle, if it were to happen, then you're able to transfer that risk to an insurance company. So these are things like life insurance, health insurance, homeowners insurance, car insurance, umbrella insurance, right? That's liability insurance. So if something terrible were to happen, if your house were to burn down and your house is worth 300 grand, you probably don't have 300 grand sitting in the bank where you would be able to make yourself whole as if it never happened. So you need to buy homeowners insurance, the same thing, life insurance, health insurance. So this all becomes part of your financial plan and you want to make sure that you have all the right stuff. And now the sixth part would be tax planning. I did a video a few months back about how to save money on taxes. You should definitely check that one out as well. But tax planning is a big part of it. You might have opportunities in your life where if your income drops, it gives you an opportunity to do a Roth conversion. There are strategies around saving money in taxes that will help you overall reach your financial goals. You don't want to pay more in taxes than you have to. And depending on your income, there are different ways that you could save and that you could save on taxes. So having a good tax advisor and doing tax planning, it's an important part of your overall financial plan. And then number six would be the college savings component. So I mentioned it a couple of times already, but if you have children and one of your goals is to save for them to go to college, then there are specific ways that you could do that. And that is part of your financial plan. Maybe it involves opening 529 plans or Coverdell Education IRA accounts. There are different ways that you could save for your kids to go to college if that is a goal for you. And then the eighth part would be charitable giving. If being charitable and donating money, if that's important to you, there are certain strategies about the best way to do that. And that should be part of your overall plan, part of your budget, part of your cashflow. So it's got to be part of the entire picture when you're creating your own financial plan. And then number nine is estate planning. Now this is another one of those intimidating terms, but all it really means is just planning if you die, unfortunately. If you have an unexpected or an untimely death, even if not, it's just your planning for your death. And the way that you do that is through having a will, through a healthcare proxy. If you were going to hospital and you want to appoint somebody else to be able to make healthcare decisions for you, and also a power of attorney where somebody else could sign checks on your behalf or do things signed for you if you're in a coma, if you're incapacitated, if you're not able to do it. And this is an overlooked piece, but it's so important. Even if I just throw a couple scenarios out there, like what if you're married? Let's look at me for an example. I'm married. I have three sisters. My wife has a brother. All four, my parents and my wife's parents, everybody's still alive and we have three kids. So if we didn't have a will and something happens to me and my wife, what happens to the What if everybody wants my kids and everybody's going to fight over who gets it? And then the court would end up deciding. So that would be pretty crappy. If you have a will, you could dictate exactly how it would play out. But even if we take that a step further, we have millions of dollars of life insurance on us if we were to pass away. So now if that happens and I don't have a will, if I haven't named somebody to be the custodian for my children, then who manages that money? Who gets to decide who it's spent on and how it all plays out? So you need these documents in place. If something terrible were to happen, or even the power of attorney, if I ended up in the hospital and I needed my wife to be able to sign my business checks or be able to make decisions for me, I want that in writing so that there's no questions asked and that she could act on things. So these things are very important when it comes down to it. And you just want to make sure that you have that buttoned up so that it's not hanging over your head if something were to happen. So now when you complete those nine components of the financial plan, then you have your starting point. Now you've organized everything. It's forced you to do that. You've had to think about your goals, where you want to go in the future. You have to take a hard look at what you're currently doing and if it aligns with those goals. You've reviewed what kind of insurance you have, if it's the correct insurance, your estate plan, if you have your will done, your power of attorney, your health care proxy. You've done all of these things, all of your benefits through work. You're in a much better financial position than you were before you started this exercise. And it isn't that painful. And when you're done with it, you feel a sigh of relief. You feel much better that you're finally in the position where now you can move forward and you can start doing things the right way if you were doing them the wrong way in the past. Or you could just continue and maybe you realize that, you know what, I'm really on track and I'm doing awesome. But being in the dark, that's the worst place to be. So just by going through this process, it's really going to help you move forward. So what's the difference between a financial plan and financial planning? So a financial plan is what we just discussed. It's those nine items that you have to create your plan specific to you, where you are, where you're going, how you're going to get there, your goals, your dreams, all of that is your financial plan. Financial planning are the updates, the changes, the situations, the circumstances, everything that's going on in your life. So like, for example, if I have a client who calls me up and said, you know what, I just got this big fat bonus at work, what should I do with it? That's financial planning. If I get a call that says my mother just passed away and I'm the executor of her estate, that's financial planning. There's a lot of things that need to be done. If a client calls me up and says, I'm pregnant, I'm about to have my third child, we weren't expecting this, what do I need to do? That's financial planning. If I get a call saying, you know what, we decided that we want to move, we're going to move 12 months from now, what do I have to do? Financial planning. I lost my job, what should I do? Financial planning. I don't feel safe having my money in the stock market. I think that we're going to go into a deep recession, what should I do? So in all these different scenarios, this is where you would be doing financial planning, where you need to make changes, where something's happened that's different than what you initially planned for and you need to adjust for it. But all major decisions, you need to go back and look at your financial plan. What did I plan for? What are my goals? And do I need to change anything? And how should I plan around this new piece that's been introduced into my life? And obviously I'm biased, but I think it's so important to have somebody that you trust that you could go to when all of these decisions come up in your life and they're important to you. So I hope that you found this helpful. If you'd like me to be that person for you, go check out www.SchoolOfPersonalFinance.com, see how you could work with me. I appreciate you watching this video. I will see you again next week. Thanks a lot.