Financial Planning for Beginners

Introduction

If you’re like many beginners, the thought of learning something new — especially something complicated, like managing your finances — can be a little nerve-wracking. That might cause you to either procrastinate altogether or rush ahead without thinking it through.

Luckily, some financial literacy and planning tips for beginners will help you navigate the jungle of complex economic processes to emerge victorious on the other side.

What Is Financial Planning?

Financial planning is pretty much what it sounds like: planning your finances to reach your short- or long-term financial goals.

If you didn’t enjoy math in high school, this might not seem very fun. But it’s not just math. It’s money. And money is cool.

In fact, financial planning can be an exciting adventure. It involves looking at how much money you have, deciding what you want your future to look like, and mapping out how to reach your goals.

You become the hero in your own journey. You’re Luke Skywalker taking on the evil Empire, Dorothy finding her way back home from Oz, Harry Potter fighting that guy we can’t name, or Neo coming to terms with The Matrix.

Now it sounds like fun, right? OK, lace up your boots, grab your lightsaber, and let’s start exploring that financial jungle.

Financial Planning Steps

A successful journey requires following a proven path. There are five basic steps to the financial planning process.

Determine where you are now

First you need to figure out where you’re starting from, which in the classic hero’s journey is called the “ordinary world.” This is your current financial situation, including how much you make each week or each month, and how much you need to spend on food, housing, and other necessities. Subtract your expenses from your income to figure out what you’re working with.

You’ve now got the framework for a budget. This is something many people dread, but every financial planner recommends as being crucial.

Decide where you want to be

Next, establish your short-term and long-term financial goals. Where do you want to be in six months? In 10 years? Your vision might include higher education, retirement, or investing opportunities.

In the hero’s journey, this step is the “call to adventure.” Don’t worry if you’re unsure because every hero goes through “refusal of the call” where they’re reluctant to change. But once you get past that, things can become pretty exciting.

Choose the path to get there

Once you know where you are and where you want to be, you can figure out how to get there. This includes identifying and evaluating various courses of action. Do you need to pay down your high-interest debt, or create an emergency fund? What about starting a retirement account or a diverse investment portfolio?

At this point, a hero is “meeting with the mentor” to overcome their trepidation. Whether that’s Obi-Wan Kenobi in Star Wars, Gandalf in Lord of the Rings, Dumbledore in Harry Potter or Morpheus in The Matrix, these teachers guide the novice hero. So think about using a financial advisor to help you map out your journey.

Implement your action plan

A mentor can show you the way, but you as the hero in your own journey need to make it happen. There are many different paths to success, so choose the options that make sense for you. You’re now “crossing the threshold” of the hero’s journey, ready to face what lies ahead.

To get into the nitty-gritty of your financial plan, you’ll want to consider your risk aversion. Higher-risk investments can lead to higher reward (or total loss) while lower-risk investments and deposits are safer but have less potential for profit.

Review and revise your plan

You’ll run into roadblocks, tests, and other challenges on your financial journey. If you lose one battle, you learn what not to do next time.

Luke Skywalker failed many times while learning to use The Force. Neo failed while getting used to The Matrix. It’s OK as long as you review what went wrong, make adjustments and revisions if needed, and continue on your way. There will come a time when you “seize the sword” and reap the reward.

Did you pay off your student loan or credit card debt? Add to your emergency fund? Increase your contributions to your retirement fund? Stay motivated by celebrating these milestones and successes when they occur.

Types of Financial Planning

Everybody’s journey is different, but there are six types of financial planning to consider in yours.

• Cash flow planning helps you make a budget by analyzing what’s coming in and going out.
• Insurance planning makes sure you have the right mix of coverage for your needs.
• Retirement planning looks at how much you’ll need when you retire, and the best ways to reach your goals.
• Tax planning involves minimizing your tax payments by maximizing your eligible deductions, exemptions and tax credits.
• Investment planning is about considering your risk aversion and choosing the right portfolio mix for your comfort level.
• Estate planning is the process of managing your assets and documenting how you want them distributed after you pass away.

Why Is Financial Planning Important?

Financial planning lets you create a brighter future that fits your personal goals. Eventually, the hero of our story always returns with a “magic elixir” or new knowledge that boosts their confidence and gives them a new outlook on life. This is what financial planning can do for you.

The hero’s journey might be a suitable metaphor for how the process works, but this is more than just a Hollywood blockbuster or riveting adventure novel. It’s your life, and you deserve for it to be the best it can be.

Bottom Line

Many people put off financial planning because they find it too complicated, too scary, or too much trouble. But now you know it can actually be a fun journey, full of challenges, revelations and triumphs.

The right investments, decisions and plans can go a long way toward crafting your vision of the future. So go ahead and put on your hero hat, cross that threshold, face your fears, and come back with the magic elixir of financial planning success.