Financial Planning Basics

Written by: Michael Tynan, CFP®, Managing Director, Financial Planning

What was your favorite part of your money management class back in high school or college? Do you remember what your final grade was? You probably don’t because, if you’re like me, you didn’t actually receive any formal education on how to manage your money.

Your educators were maybe a family member (if you were lucky), a work colleague – and for some of the younger generations, Google, YouTube, or even Instagram or TikTok.

In fact, when it comes to social media the market is saturated with everyone from all walks of life claiming to be a financial planning expert. There is so much advice out there, that for many it quickly becomes white noise; for others it can be debilitating.

During my career I have met with thousands of people and families. Some as young as high school students, others approaching 100 years old – some just getting started in the world with only the money in their wallet, others enough to last for generations. The question I get asked the most, regardless of their age or net worth, is: how do I get started?

To answer that I would like to share the 4 steps that I believe every investor should follow and if you do so to set themselves up for success.

In order for us to get started its good practice to understand what’s coming in the door (salary or other income) and what’s going out the door (bills and other expenses). There are a number of apps, or programs that you can download or subscribe to that will help automate this information. Of course, there is also the “old fashioned” way of simply reviewing your bank statement each month.

Regardless of which path you choose, a good benchmark to review would be the last 6 months’ worth of bank and credit card statements. The first part to grasp is how much money is coming in to you each month. Whether it’s salary from your job, or performance bonuses, retirement income or Social Security benefits. List out the items that function like a paycheck and those are your inflows.

Next, review what expenses you have on a continuous basis. Those are usually expenses related to housing, such as your rent or a mortgage. This also may include electricity, internet, and heating bills. If you have any debt you’re paying such as student loans, or a car loan or credit cards, make sure to capture those also. Once you finish tabulating these costs that you HAVE to spend each month write down the word ‘Essential’ next to them.

After you finish with the essentials, list the fun stuff like traveling, eating at restaurants or joining clubs. Be conscious of items that might fluctuate (fast food vs. fine dining) just in case you need to trim that number. These are your discretionary expenses.

Now, add the value of your income sources and subtract your expenses. Hopefully, you end up with a positive number. If your calculation reveals a negative number, then you’re living beyond your means and probably pulling money from savings or ringing up credit card debt. Take a look at those discretionary numbers and see where you can make cuts. If you get a positive number, then see how that matches up with any contributions you allocate to savings or investment accounts. If you see consistency, then great job! If the numbers don’t match, then maybe you need to go back and recheck your budget and see if you’re actually spending more money than you think.

Now comes the exciting part of the exercise. What are we doing this for? The answer to this question is open-ended and based mainly on your life stage. You could be saving for that down payment on your first home? Maybe you just welcomed your first child and you want to start saving for your child’s future. Or perhaps the mortgage is almost paid up, the kids are out of the house and you can see retirement coming at you full speed.

Not sure? That’s OK! The first rule of thumb is to make sure you have at least three to six months’ worth of living expenses in cash in case of an emergency. Once you feel that you have enough coverage, check to see if you’re taking advantage of all of the available tax-friendly saving options (more on this in a future writing).

This step is decided by two factors. The first step is to establish a time horizon—when you expect to need the proceeds of your investments. The second step is determining your appetite for risk and how much volatility you can withstand. The conventional wisdom is the longer your time horizon, the greater the risk you should take. Once you understand your time frames and the level of risk you’re comfortable with, then you must decide how to invest, for example, stocks, bonds or mutual funds. Do your homework before you buy securities so you understand what you own and why you own it. You’ll also want to develop a sound investment philosophy that you stick with. If this seems like a lot, a financial advisor can help.

We are all the CEOs of our own financial plan and well-being. But do we also want to be the chief financial officer? Some of the responsibilities may be best delegated to a financial advisor. Your advisor can help you develop a goals and a savings strategy, build a risk-diversified portfolio, pay down your debt, and wide variety of other topics that may be important to your financial well-being.

When it comes to financial control, remember that these four steps will evolve over time, and will follow you through every stage of life. And while this process might feel a bit overwhelming at first, it gets easier. The clients I have worked with find that the more the more they work at it and the more coaching they get, the more control they feel.

Don’t wait to begin your four steps to financial control. You can always reach out to an Oppenheimer financial advisor who would be happy to help you on your financial planning journey.