The Five-Question Financial Plan
Financial plans do not need to be lengthy, complicated documents filled with charts, graphs, and statistical probability. Chances are, if you’ve gone to the trouble of having a “full financial plan” prepared for you, you probably spent about $3,000 or more (in commissions), listened to the presentation, and then never reviewed the document again. There’s another way. I propose a five-question financial plan is all most of us need to do. Here is the simple process:
Where do I stand today?
No matter what you want to accomplish in life, you first need to have a clear understanding of your starting point. Answering this question requires you to do some digging into your accounts and records. You should be able to report all the balances in your bank and investment accounts, an estimate of how much your belongings and real estate are worth today, details of your insurance policies, the amount owed on loans and credit card balances, and your monthly income and how it gets spent. If you don’t know the answer to this question, spend the time to put it all down in a document you keep handy and update annually. There are plenty of free templates for net worth statements and budgets (these two documents clearly answer “where do I stand today?”).
2. What do I want to accomplish with my finances this year?
Many of us can spew out a plethora of “I shoulds” when first attempting to answer this question. I challenge you to not think about what you have been told you need to do. Instead, take some time to think about what brings you true joy. How can you do more of this? Is there something you are yearning to try, do, or attain? The goal is to be able to spend a year working toward realizing more of what makes you feel confident, in control, accomplished and joyful in a fiscally responsible way. Please don’t list out more than five things you want to accomplish. Three things are more realistic.
3. What can I do to better align my spending with my goals?
For most of us, this is the key to accomplishing our goals. This is the moment you get real with yourself. Is your money going to the things that bring you joy? Do you spend money on what truly matters to you? Give every single penny a purpose and that purpose is to have a more enriched life and a deep sense of accomplishment. If there are things (or people) that are sucking your resources and providing you with nothing you want in return, figure out ways to systematically fix that problem.
4. How do I grow my assets?
Or, simply put, how do I make more money? It’s not about accumulating more stuff. It’s about being able to say, “if I had to sell it all today, I’d be OK”. Debt can be the enemy of growing assets. However, you have four ways to increase your net worth and grow assets: Make more money, spend less, buy things that increase in value over time, and pay off debt.
5. How do I decrease my liabilities?
This is the final question and it’s placed at the end to purposely linger in your mind the longest. Simply put, liabilities are debts that hold you back from financial success. There is good debt and bad debt (sorry to the Dave Ramsey faithful, but it’s the truth). Good debt allows you to buy assets that increase over time (real estate, businesses, advanced degrees that earn higher pay, other investments). Bad debt is used to buy things that decrease in value over time or are immediately consumed (cars, clothes, vacations, electronics, entertainment. . . ). Being completely debt free is a wonderful accomplishment, unless you have accumulated close to no real assets due to your fear of taking on debt. The point is to eliminate your bad debt. Look at your good debt and see if you can improve terms, consolidate it or use it to grow assets (again, things that increase in value over time).
So that’s it. Your simple 5-question annual financial plan. Pick a month and make it your financial plan month. Do it every year. Include your significant other. Review it monthly if this is new to you, quarterly when you have it down. Make sure you congratulate yourself on your success and step it up every year. I welcome your thoughts and questions, so please feel free to share them with me. Happy planning!