Part 1: The Importance of Developing a Financial Plan

[Part 1 of 12 in a series on How to Turn Your Financial Goals into Reality.]

Many of us may have experienced financial frustration. Perhaps we frequently come up short on enough money to pay all the bills that have accumulated. Perhaps our savings account balance has become a permanent “zero.” Or maybe our use of credit has us stuck in a deep financial hole with seemingly no way out.

Frustrations like these may tempt us to give up or assume that we do not have enough financial “know-how” to change our circumstances. At one time we’ve all had grand dreams and expectations concerning our financial future and yet the how-to of achieving our goals remains a mystery.

I’ve worked as a professional financial advisor for over 10 years and during that time I’ve helped many people get started on a journey to financial well-being, including some that experienced the aforementioned frustrations. It may come as a surprise that the first and most important step of each one of those journeys was developing a realistic financial plan— one that is uniquely suited to the individual or couple.

Financial Discipline Required

Achieving financial goals depends more upon disciplining oneself to a plan of action than having any special financial knowledge or business insight. It is a widely accepted myth in American society that in order to have financial success one must start a business, invest in a stock that has the next “big idea” or invent something everyone will need.

These are things that successful people do, but it is not what they do first. First they develop a plan. I am not aware of anyone who has been successful at something they did not plan to do. Financial success is a result of faithfully carrying out a pre-determined plan that is set into motion only after much consideration has been given to it.

Establish Financial Order

In developing a financial plan, one should first direct his attention and focus upon the financial situation as it currently exists. This will require a close examination of one’s income and expenditures. It is vital to know how much money is coming in and how it is being spent. At this point it is not necessary to evaluate whether the expenditures are necessary. We are mainly concerned in determining where the income is being spent.

Ideally, one would review a year’s worth of income and expense data. If that is not possible, review as far back as possible. Be especially diligent to include bills that are not routine or that are paid only once or twice per year. These expenditures are easily overlooked.

Assign each transaction from the review period to a budget category. This task is most efficiently performed with the aid of a good financial software package. Each one is different, but most are easy to use and come with a pre-set list of the most common income and expense categories. The program will automatically add up the data you provide for each category and can display and print reports that make analysis of your situation straight forward.

If you do not have a software program or do not foresee acquiring one in the near future, you can easily record your transactions on a paper ledger and add the columns manually when the review is completed. Most expenses will fall into the following broad categories: apparel, food, gifts, health care, home maintenance, insurance, rent (mortgage), office supplies, recreation, repairs, taxes, transportation, utilities. Other categories and sub-categories can be added as they become apparent, such as charitable giving, club dues, subscriptions, etc. Try to limit the use of a miscellaneous category. This should only be a temporary holding place until other suitable categories are found.

Building Something from Nothing

Sometimes there is little in the way of records to review. This may be the case for a young adult that has yet to develop a record-keeping system or a person that, for whatever reason, has failed to maintain adequate financial records.

When this circumstance arises, I recommend starting a spending journal. Get a small notebook that can be carried with you. Record everything you spend at the time you spend it, regardless of how much it is. Do this for three months and then enter all expenditures in a budget category as mentioned previously.

First Steps Review

1. Make the decision to take control of your financial life by developing a detailed plan of action.

2. Organize your financial records for the past year or as many months as you have available.

3. Obtain a basic financial software program for your computer and review the instructions. If a computer is not available, acquire a ledger book.

4. Select categories for income and expenditures in the software program or as column headings in the ledger.

5. Accurately enter income and expenditure data in program or in ledger.

Where Do We Go from Here?

The task of organizing one’s financial information can seem difficult, not only since it may require a great deal of time, but also because the process can remind us of past and present financial failures. Do not dwell on the negative aspects, but rather think of the future benefits that will come by taking the first step toward controlling your finances.

So far, I’ve provided only the initial steps of developing a financial plan. However, making the decision to get started and get organized is paramount to achieving financial success. It is the basis on which all future plans and decisions are made. The sequence of steps in preparing a financial plan is also important. As with instructions for building a do-it-yourself home project, there are certain steps that must be in place before the next step is begun.

Speaking of next steps, this is the first in a series of articles on How to Turn Your Financial Goals into Reality. In next month’s article I will demonstrate how to utilize the budget numbers developed in this month’s issue and provide a “can’t fail” method for setting and prioritizing financial goals.

Dale A. True, Registered Investment Adviser
True Financial Strategies, LLC
April 2008

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