FINANCIAL PLANNING STARTER KIT

You no doubt have heard of the benefits of personal financial planning, and you probably want to better manage your personal finances. Yet it all seems so overwhelming. You're not sure where to start. Beef up your retirement accounts? Invest in mutual funds? Buy insurance? Look for ways to cut taxes? Budget? Get a will?

To help, here's a financial planning starter kit. It establishes priorities for anyone at any financial stage of life, from freshly minted college student to retiree, who has done little or no financial planning.

Establish or review a financial plan. At its most basic, a financial plan is a written set of goals and strategies and timelines for accomplishing these goals: buying your first home, funding or managing a retirement nest egg, funding college for your children, paying off debts.

Writing out this plan, whether on a yellow pad or with the help of a financial advisor such as a CERTIFIED FINANCIAL PLANNER™ professional, motivates you to carry out the other aspects of your financial life. It provides direction, sees you through the inevitable rough spots, and makes the most efficient use of your financial resources.

Review your plan periodically to adjust for changing financial circumstances or desires, or life events such as marriage, job loss, retirement, birth of a child, or a death.

Organize your financial records. It's difficult to successfully manage your finances if you don't know what those finances are. How much money do you really have in your investment accounts or what type and how much insurance do you have?

Beyond collecting and organizing the usual financial records such as investment accounts, bank and tax records, and estate planning documents, don't forget to inventory your household possessions. This documents not only their value for planning purposes but provides a list for the insurance company in the event your possessions are lost in a theft or natural disaster.

Calculate your net worth. Once your financial records are organized, calculate your net worth. This is your total assets, from investments and home equity to the value of your personal belongings, minus liabilities such as your mortgage, car and student loans, and credit card debt.

Net worth is the best measurement of the state of your financial health. Many of your major spending, saving, and other financial decisions are made, or should be, based on your net worth. You'll want to monitor and benchmark your progress in building your net worth in order to achieve your financial independence. Don't guess at this. Most households get it wrong.

Build an emergency fund. Ideally, you'll accumulate enough cash in it to see you through three to six months of bare-bones living should you lose your regular sources of income. Planners often recommend that retirees have two to five years of cash equivalents such as certificates of deposit and short-term bonds so they don't have to sell equities in their retirement portfolio during down markets.

Establish a spending plan. Again, regardless of your financial stage of life or your net worth, maintaining a spending plan that balances income with spending and savings should be a financial priority. It provides a way to keep on an even keel all the other good work you're doing financially. A spending plan identifies the key areas where you want your limited income to go, and identifies wasted spending. It also can provide an early warning sign of impending financial problems.

Reduce or minimize consumer debt. Debt drags down the rest of your financial efforts like a heavy anchor. If your consumer debt (excluding your mortgage) is eating up 15 to 20 percent or more of your monthly budget, make reducing it a priority.

Draft four key estate planning documents. Every adult should have (1) a will; (2) a financial durable power of attorney, which appoints someone to handle your finances if you are unable to; (3) a living will, which declares what life-sustaining medical treatments you want should you be incapacitated; and (4) a health care durable power of attorney, which appoints someone to watch out for your medical interests.

Have proper insurance. Managing your risks is essential to your long-term financial security. Insurance, from medical and disability coverage to life and homeowner's, protects you from financial catastrophe. Don't skip it, or skimp on it, to "save money."

Edited and revised by Charles P. Buck CFP™.  Produced by the Minnesota Chapter Financial Planning Association.