In 2008, I was in college full time; looking for a job. As the economy continued to shift; I shifted my focus on my passion for helping others and finance. Soon after a quick internet search landed me on the terms “financial planning for beginners”.
Financial Planning for Beginners, the start
When I first started out in my financial journey, I collaborated with friends and family on their financial situations. As the stock market crashed I fielded many questions and concerns about investment portfolios and housing.
It was a wake up call for me and it might be for you, too. Financial planning for beginners isn’t just for twenty somethings or people struggling with money.
It’s for anyone who hasn’t or can not take the time to strategically map out their financial future. Whether you’ve been comfortable with your finances or recently found yourself with a significant net worth or income; starting fresh with a comprehensive financial plan is A Small Investment for your financial success.
Why You Can Benefit From a Financial Plan
It’s Not About the Income, It’s About the Plan
Many people believe that once they start making more money, their financial problems will solve themselves. Unfortunately, it doesn’t work that way.
You can often face more complex financial situations than your peers or success stories online. These complexities include higher taxes, bigger spending habits, and larger, more diversified (or not so diversified) investments.
Think about it like this: Would you travel to a city that was 100 miles away by foot? Most would answer no.
However, if you knew 2.5 million dollars were waiting for you in that city. When would you start walking?
This is an easy question for most and the most common answer I receive is yester…day…year…years.
Your income is the steps, but without a solid plan, it’s like walking in circles and never actually arriving at your destination city. A financial plan helps you make sure that the wealth you’ve accumulated works for you, now and in the future.
Managing Risk as You Build Wealth
As you accumulate wealth; financial planning for beginners seems a bit basic. As we look further into your actual needs, starting as a beginner builds a solid foundation.
Managing risk becomes more critical. A high income won’t protect you from market fluctuations, tax liabilities, or an unexpected life event.
This is why financial planning matters. Because it helps mitigate the risks that can erode your wealth over time. You might be thinking, “I’ve got a good nest egg, do I really need to worry?”
The answer is yes, and here’s why: financial planning is your safety net. It protects your future, even if today looks secure.
Key Elements of Financial Planning for Beginners
Cash Flow Management: The Overlooked Essential
One of the most overlooked areas for high earners is cash flow management. It’s easy to assume that a hefty paycheck will always cover expenses.
However, without properly tracking your spending, you could be leaking money on things that don’t align with your goals. It’s common for high earners to experience “lifestyle creep,” where expenses gradually increase to match income.
A good starting point is tracking where your money is going each month. Budgeting is not a fun activity and many do not enjoy the process of budgeting and can find it tedious.
Nevertheless, knowing how your money is being saved, invested, and spent can not be overlooked. I have clients I work with that are usually surprised to find out how much money they are spending on a discretionary basis.
After tracking the expenses for a few months, clients are able to clean up miscellaneous expenses. Also, allocate more to savings and investing.
Redirecting “found cash” allows for the efficiency allocation to goals, and shortens the time horizon to achieve your financial goals.
Investment Strategy: Tailored to Your Needs
Are your investment strategy truly tailored to your financial goals and risk tolerance? One of the mistakes beginners often make is having an overly aggressive or too conservative portfolio that doesn’t match their stage of life or needs.
A solid investment strategy should reflect your current life stage, retirement plans, and any financial goals you have. No matter your age, if you haven’t adjusted your portfolio for risk, it may be time to do so.
Diversification, asset allocation, and regular portfolio reviews can make a significant difference in your long-term financial success.
For example, if you are a set it and forget it investor, and like most contribute to your portfolios on occasion. It’s easy for cash to accumulate in your portfolio. As well as, continuing to invest in the same investment over time can lead to increased allocations of one investment class over another.
Tax Planning: Not Letting Taxes Eat Your Wealth
As your assets and income increase, so does your tax bracket. For those in higher tax brackets, tax planning becomes essential.
Without a strategy in place, taxes can quickly erode your wealth. Maximizing tax-advantaged accounts like 401(k)s, IRAs, or Health Savings Accounts (HSAs) can help reduce your taxable income while growing your investments.
If you are in your 50s and have not paid close attention to your forthcoming tax situation. Now is the time for financial planning for beginners tax focus.
It’s easy to focus on the now; however, as we shift the focus towards retirement and later life goals we can shift the focus from income to expenses and what expenses you plan to have in retirement.
For most pre retirees that are shifting from traditional careers/working to a different career/work, or not; are focused on expenses rather than income. Great increases in income in retirement can potentially mean higher taxes.
After a deep dive into your finances, we can implement tax-saving strategies that reduce the taxes you pay, and preserve your wealth.
This is where I exemplify my value as a financial planner and the power of planning ahead.
Risk Management: Protecting What You’ve Built
Continuing on financial planning for beginners, let’s discuss shielding your finances. This means having the right insurance coverage and estate planning strategies in place.
As your wealth increases, so does the need to cover and shield your assets. The easy answer is an umbrella insurance policy.
But consider this: what happens to your wealth if something happens to you? Without an estate plan, your assets may not go where you intend.
Plus, there could be significant tax implications for your heirs. Working with an estate planning attorney to ensure your wealth is protected and passed on according to your wishes is a crucial part of any plan.
However, there may be a better way to protect your assets, and support your estate planning goals as well. I do not make this complicated, and want my clients to maximize their potential to reach their financial goals.
Retirement Planning: Turning Wealth Into Income
You’ve worked hard, and now you’re thinking about the next chapter, retirement. But have you thought about how you’ll turn your assets into sustainable income?
Unless you have a pension or social security/railroad retirement that is enough to support your expenses in retirement; then, we would need to not just focus on a pile of money at retirement. And more so, It’s about ensuring that your wealth will last through your retirement years.
A retirement plan should account for the transition from earning to withdrawing, ensuring you don’t outlive your money. This is where strategies like withdrawal rates, sequences of withdrawals, Social Security planning, and managing required minimum distributions (RMDs) come into play.
Steps to Begin Your Financial Planning Journey
1. Assess Your Current Financial Situation
Before you can create a plan, you need to know where you stand. Start by evaluating your assets, liabilities, income (Cash flow), and expenses. Understanding and organizing your finances helps you identify where improvements can be made.
This includes everything from debt management to investment accounts to tax planning strategies.
2. Set Clear Financial Goals
Next, outline your short, mid, and long term financial goals. Do you want to retire early?
Leave a legacy for your family? Fund a charitable cause? Your goals will shape the structure of your financial plan.
3. Consult a Financial Planner
Financial planning can get complicated, especially for high-net-worth individuals. Working with a Certified Financial Planner (CFP®) can help you create a plan tailored to your needs.
A good planner will not only help you create the plan but also adjust it as your life and circumstances change.
Avoiding Common Mistakes in Financial Planning
Ignoring Cash Flow Management
It’s easy to fall into the trap of thinking that high income means you don’t need to watch your spending. But without proper cash flow management, it’s harder to make the most of your money.
Tracking where your money goes is essential for optimizing your finances.
Underestimating the Impact of Taxes
Not having a tax plan can severely impact your financial health. High earners, in particular, face unique challenges with taxes.
Planning ahead with tax-advantaged accounts and other strategies can help you avoid unnecessary tax burdens. For example, how are your investments situated between taxable and tax deferred accounts as you move closer to retirement?
You may currently have growth concentrated investments in your taxable account to minimize your annual tax liability. While this strategy naturally shifts for retirement to reduce risk; we implement the most tax efficient manner to do so.
Failing to Revisit Your Plan Regularly
A financial plan we establish is a living document. As your life evolves so should your plan. Whether it’s a job change, the sale of a business, or the birth of a grandchild—your plan needs to evolve, too.
With quarterly conversations we can ensure you’re on track.
What’s Next… Start Small
Financial planning for beginners isn’t about having it all figured out from the start. It’s about starting and focusing on what’s most important to you financially speaking.
Whether you’re thinking about your long-term financial future or need to revisit your plan, the time to act is now. You’re not alone, let’s have a conversation to take control of your financial future with a well-crafted plan.
Secure your wealth, protect your legacy, and live with the peace of mind that comes from knowing you’re on the right financial path.
So, what’s your next step? Ready to start your plan?