Wealth Chronicle: 4 Steps to Personal Financial Planning – Brainerd Dispatch

Not everyone needs a comprehensive retirement plan.

Maybe your financial situation is quite simple: you’re in your 20s or 30s and working your first or second job. You don’t have a lot of credit card or college debt, but maybe you’re trying to save for a car or a first home. You can create a personal financial plan in four simple steps that will allow you to pursue these goals.

Step 1: Gather and organize your financial information

Having good information about your finances is the foundation of a good personal financial plan. Here’s what you’ll need to determine your assets (what you own) and liabilities (what you owe):

  • Investment account statements: taxable brokerage accounts, 401(k) and/or defined benefit pension, IRA, Roth IRA,
  • Your total debt, such as school loans, car/boat loans, insurance premiums, mortgage and home equity line of credit, etc.
  • Estimates of any expected future inheritance.

Next, you need to gather documents showing your income and expenses over the past year or two:

  • Your annual salary (W-2),
  • Concert work income if you are a contractor or concert worker (1099s),
  • Certificates of deposit (CD), interest from money accounts or savings bonds,
  • Taxable dividends,
  • Your bank, credit card statements.

For expenses, you will need to create two lists: What you spend on non-discretionary items (such as groceries, utilities, health insurance, clothing, transportation, child support, annual child support payments, debt on each of your loans, taxes, etc.) and what you spend on “fun” things (like dining out, travel, entertainment, hobbies, charitable donations, etc.).

Step 2: Focus on your total debt picture

What do you owe and how do you plan to repay it? Make sure you understand the interest rate you are paying and whether the rate is fixed or variable. Is part of it tax deductible?

Conventional wisdom says pay off your biggest loans first. This may make sense depending on your tax situation, the interest rate you pay, and whether the debt creates value.

Most people agree that you should also pay off your debt at the highest rate as quickly as possible, especially now that interest rates are about to rise, according to the Federal Reserve.

Never pay the minimum balance on a credit card. You’ll struggle to get out of debt and pay a lot more over time than you would have bought with cash.

We believe that credit cards are only used for convenience, not because it gives you the ability to defer payment for something you want. We generally advise customers to have no more than one or two credit cards and to pay them off in full each month.

Step 3: Review your asset allocation in your savings and retirement accounts

Are you taking too much or too little risk with your investments? If you’re saving for a big purchase in the next five years, like a house, you’ll probably want to put your savings into conservative accounts, like a money market fund. On the other hand, if you are saving for your retirement in 20 or 30 years, you may be able to take more risk by owning more stocks.

Over time, as you approach your retirement date (say, 10 years from now) and depending on your personal circumstances and risk tolerance, you should probably maintain some equity exposure, but gradually build up more conservative investments such as bonds or cash.

Stick to low-cost, high-rated funds that you understand and rebalance them about once a year around your target allocation (i.e. the percentage of stocks and bonds you favor in your portfolio – this should be adjusted as your risk tolerance changes).

Rebalancing means selling your winning funds and investing the proceeds in your underperforming ones, so that you maintain the level of overall portfolio risk that you feel comfortable taking.

Step 4: Build a work budget

Once you have mastered your assets and liabilities, your income and expenses, and how your long-term retirement money is invested, you should be in good shape to set up a working budget.

Here are some guidelines to get you started:

  • Separate your wants from your needs. Reduce desires as much as possible.
  • Build up an emergency fund for six months of living expenses.
  • Pay off high-interest, low-balance credit cards.
  • Make a habit of saving about a small amount each month and increase it over time.
  • Don’t forget to include your pension plan contributions in a line item!

This simplified four-step personal financial plan is a great way to step back into becoming financially independent. If you need help getting organized, consider working with a financial advisor to help you develop a comprehensive financial plan that considers the many sources and uses of your money, investment returns, interest rates, and your future goals (including how those goals might change over time). ).
The opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations to any individual.

Diversification does not guarantee a profit or protect against investment losses. Investing involves risk, including the risk of loss of principal.

Rebalancing does not guarantee a profit or prevent losses. Investing involves risk, including loss of principal.

Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on News Radio 830 WCCO on Sunday mornings. Email Bruce and Peg at [email protected] Securities offered by LPL Financial, member FINRA/SIPC. Advisory services offered by Wealth Enhancement Advisory Services, LLC, a registered investment adviser. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL.

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