Reduce Debt Increase Wealth

Financial Plan

July 25, 2021 MisterChuck Season 2 Episode 71
Reduce Debt Increase Wealth
Financial Plan
Show Notes Transcript

A simple approach to getting a financial plan in place. Financial plan will help track goals, set spending limits and get an emergency fund into place. Financial plan help identify your short comings with finances and directs movement to a better place. 

Article Links:

https://www.schwab.com/resource-center/insights/content/10-steps-to-diy-financial-plan By Carrie Schwab-Pomerantz

https://savology.com/6-benefits-of-financial-planning By Sam Jones AFC

Charles McDonald:

Hello, I'm your host, Mr. Chuck. I'm a retired accountant, turn truck driver, I have reduced my debt to zero in a short matter of time, debt reduction to achieve financial freedom takes commitment, confidence, determination. personal financial plan, why do you need one? And how do you get it done? Some people think it's only for wealthy, but you can do one on your own very easy, and it's not too difficult. In fact, since I've been preaching doing them, I've never done one for myself. So this morning, I wrote up a personal financial plan for myself. And it took me about 20 minutes. That took me 20 minutes, because I'm already using a program for my budgeting. So my budgets already set up, I didn't have to deal with it. I already have an investment where I can investment counselor where I can go online and see what my work is already set up. So what I needed to do is set my goals, short term goals, one to three years, mid term goals, three to six years, and long term goals, anything over six years. Well, my long term goals are not really that long. But I wrote it up that way. My retirement is one of my long term goals has been for a very long time. So I just put in there, what I'm doing, what my goals is, what balances I want, and particular accounts like my emergency fund, how much I went in there, how much I have in there currently. And when I think it should be completed, I did the same thing with my midterm goals. And then I categorize it insurance. And I have different categories that which my debts paid off. So I have a debt category. And I have wills estates and estate planning. And my final remains what I want to do with that, and insurance. So it's fairly easy to do. Just write down what you want, where you are, and where you gonna get to. So you put in where you are today, when you write it up, and what your goals and how long you think you're going to get there. That way, come back and look at it. What's the benefits having a financial plan, the process of financial planning helps you set goals. It's a great source of motivation and commitment, because once you set your goals, hopefully that a motivate you to accomplish them, it gives you a guide for action and decision making. I put in my goals for my emergency fund, what I'm currently doing, what I'm currently doing is once a month, I'm transferring X amount of dollars to a high yield savings account, I use my local bank, so I can put my money out of my checking account into my savings account. When that savings account, I have money automatically coming out twice a month, one to my high yield savings, which are debatable if it's high yield or not. And another amount coming out to my retirement account. Once I have enough in my local savings account to cover those transfers, and I build it up past that. Then I put the excess amount I transfer into my high yield savings account. And I just did a write out step by step of how I'm planning on do it. So I don't forget. Now I also take in consideration upcoming expenses or bills that I might be paying and not have enough money in my checking account to cover such as the second half of my real estate taxes that come due twice a year. I just got to make sure I don't short myself from that because once I put in my high yield savings account, I want to leave it there as long as possible. The financial plan sets your performance standards, what you want to get done and adds additional emotional and mental health benefits. So once you write it down, you have control of your finances. You're going to rest and relax and be more at ease with your financial plan with your finances all together. And financial planning has shown to improve financial outcomes because once you have a plan in place, once you have a budget in place, you see how much money is coming in. You see how much money is going out You know, where and when you're gonna start bending money that you don't have, it keeps you under control, I got an article in my show notes save ology.com, six benefits of financial planning. And it goes in more detail here. And it also has a place where you can put in your information and set up a financial plan of what you need to do. Within this article, one of your short term goals is to pay off your credit cards, your credit cards most likely is the highest rate of interest, you're paying on the money that you borrow. So that means it's costing you the most, you want to focus on credit card debt first, then maybe auto loans second tier, you want to pay off the highest rate of interest items first, and then work your way as you pay those off. And then you go and then next set, say like personal loans, car loans, and then a line of credit against your home, and then your first mortgage. Now there's gonna be people that say, you shouldn't pay off your mortgage, if you had cars, you got the money borrowed, and there's a rate of inflation, and you're gonna pay it back was cheaper money. Well, that may be true. And maybe you can invest it and make more than what you're paying out. But you're knowing that the difference. So if you got a 3% mortgage rate, which would be probably about average now, and you're earning 8%, that only gives you a net return of 5%, you can have an immediately 3% return, if you pay down that mortgage, it's up to you. But you got this is what you put in your financial plan that outline what you want to do, and when you want to do and how you're gonna do it. And you have educated goals, you review your goals, often you set SMART goals, smart goals is you need to know what your goal actually is. And when it's considered to be completed. With a SMART goal. The key is to have a specific goal that is Measurable, Achievable, Relevant, and timely, such as paying off your high yield credit cards. Maybe you have one that has a smaller balance, you pay that one off, first, you set your goal, you want to pay that off in the next four months, you set it amount, and you achieve it, then you move on to another one, and you go align your goals with values. When goals are aligned with your values, it creates a much stronger motivation to accomplish something. When you have strong enough why behind the goals you're seeking to accomplish, we'll find a way to make the goals happen. So if you pay off your high yield credit card that may be one of your goals is make a larger downpayment and buy a home or to sell your current home and move up to another home for whatever reason. Those are goals that help you achieve what you wanting to do. But you can never achieve your goals if you don't know what they are. If you don't know what your budget is, you don't know how much is coming in. You don't know how much you're spending, and where are you spending it. If you don't know those things, you'll never get ahead in life. And this article covers it gives you more detail at the start of your financial plan, setting goals, short term, mid term, long term, identifying other items that you may need, such as insurance, you most likely have auto insurance, homeowners insurance or renters insurance, that maybe you are married and have a couple children, you should have some type of life insurance, he should have a umbrella policy depending on your net worth. The umbrella policy gives you a greater coverage on your auto and homeowners insurance in case something bad would happen. And it's fairly inexpensive. And then again, you just need to do your research and keep informing educating yourself on what works and what would work for you. Everybody's different. It's not gonna be easy, and it's gonna take you some time to figure it out. I've covered this in the past. How do you create your own budget, you start out by just looking over the past month or two months. You list out one list is all your debt, all your credit cards, all your auto loans, all your personal loans, all your mortgages, make a list of them in that list should be the name of the financial institution, the unpaid balance the right have interest and your monthly payment for credit cards, put in the minimum payment. Why? Because you're going to start making the minimum payment on every credit card, you're going to build up that emergency fund. Because the first step, and my plan is to quit creating new debt. The second step is set that money and put it in a savings account, make a emergency fund at least $500, I prefer $1,000. And once you have $1,000 in there, that always stays in the savings account, then you keep putting money in there, once you get $2,000, $3,000, then you would take the excess over the emergency fund amount says saying it's $1,000. And you have $3,000 in there, you take the $2,000. And you pay it towards one of those credit cards that you're trying to pay down or pay off. And you do that over and over and over. How much do you transfer. Some people say well just put 20% in savings and never spend it. But if you don't know what your expenses are, is, how's that gonna work, maybe your mortgage, maybe you have insurance, maybe you'll have your groceries and gasoline and car maintenance and repairs and clothes, sometimes 20% might be too much, sometimes 20% might not be enough. So if you look at your itemized, here's my income for the month, here's everything I pay for the month. And then remember, there's some months where you're going to pay something only once a year, so I subscriptions on your computer or something. Or maybe you're going to have something you got to pay twice a year suggest my real estate taxes they paid twice a year, every January and every June, I pay my real estate taxes. I know it's coming. I may not know the exact dollar amount. But I know how much I paid last year, I know how much a half of it would be. If I get it within 50 bucks, I'm doing good. It's just a matter of knowing is your first major step that you got to do. In order to get there, you need to write down what's going on. a financial plan isn't only for the wealthy, and it doesn't have to cost a penny. No matter how much money you have, you can start with a DIY financial plan that will set you up for future success. With a good foundation in place, you can feel more confident about your finances. And when a time comes, you might need the help of a professional, you'll be that much farther ahead. And you can have a starting point with that professional and you'll be much farther ahead of everybody else. Did you know that 78% of people with a financial plan pay their bills on time and say each month versus only 38% of people who don't have a plan? Or would it surprise you to learn that 68% of planners have an emergency fund, while only 26% of non planners are financially prepared to cover and on expected x cost 68% can cover a unexpected costs without usin credit the way I read that whil only 26% of non planners can d the same. Knowing where you money is going is number one knowing what your goals ar knowing what you need to ge done is number two. So 10 steps write down your goals. And thi is from schwab.com 10 steps t DIY financial plan. It's in m show notes. I'll link write dow your goals create a net wort statement? Well, I didn't hav to do it because I already hav one set up with my financia planner. I go into thei website, put in my assets an everything and it automaticall keeps it up to date. I can go i there and take a quick look. know what my worth net worth is If you don't know what I' talking about. The net worth i your total assets, everythin you own, less everything you ow equals your net worth. So you'r buying a home, you got a car, h got a mortgage on the home, yo got a loan on the car, and yo have student debt. So your ne worth could be a negativ amount, because that's studen loan debt and we got credi cards. You don't really have a asset connected with a credi card. Maybe you have a TV, bu what's a TV where you bought big screen TV $4,000 6 months later? What's that big screen TV worth? Maybe $300 it's not really an asset that doesn't have any long term value. Review your cash flow which review your cash flow says same thing as saying you have your budget. cash flow means money and money out your expenses. How much money you earn every month be included soar. include all sources of income, be your work your spouse's work, any dividend interest or investment income, any rental income if you rent property, etc. zero in on your budget. Take a look at what you're spending and write down your essential expenses such as mortgage insurance, food and transportation, utilities and loan payments. Don't forget irregular and periodic big ticket items, such as vehicle repair replacement costs out of pocket health care costs, and real estate taxes just like I said, then write down non essentials restaurants, entertainment, even close does your income easily cover all this? Are savings a part of your monthly budget? Well, it should be examining your expenses help you plan a budget when you're building an emergency fund, and it will help you. So you're wondering how much you put in your savings account. If you do a budget on a monthly basis, you take your total income and you subtract out all the expenses you're gonna pay, including going to restaurants, grocery stores, automobile expense, gas, repairs, etc. clothes, get that in there. Because you know, every fall if you have children, maybe you buy clothes for your children to go back to school. I don't know, my mother always did. I don't know if that's still going on today. But I'm assuming it happens sometime. Maybe in the spring, you buy clothes for the summer, same thing, account for all that subtract out, one minus the other income less expenses equals $1 amount, that dollar amount is then transferred to your savings account. So your income less expenses plus your savings should come to zero. If it comes to a negative number. And you didn't put any money into your savings, unless you have a monthly expense. That only happens occasionally say real estate taxes. Maybe you had a breakdown on the car. And it was a one time thing. Those are the type of things you got to be watchful of. That's why you have an emergency fund. Because every time something goes wrong, and you have to put it on a credit card, you're getting deeper and deeper in debt. Focus on debt management, I call that debt reduction plan. Not all debt is bad. Some debt like a mortgage can help you work in your favor. If you're not overextended. Be Smart with your debt, your mortgage should not be more than 35% of your gross pay, gross pay, and before taxes and any other deductions. If it exceeds 43%, you'll be having a hard time getting any type of loans, or even refinancing because you're too far in debt. And you will struggle. If it's around 25 to 30%, you're going to be muc happier in life. And you got t be able to meet othe obligations without big struggl and get your retirement saving on track. Whatever your ag retirement savings, nearly part of your financial plan. Th earlier you start, the less yo have to save every year. Becaus it's as simple thing a compounding. You might b surprised how much you'll need especially when you factor i healthcare costs. But when yo begin saving early, you may b surprised at even a little bi over time can make a bi difference. calculate how muc you'll need and contribute to 401k or other employer an sponsor plan, at least enough t capture an employer match or a IRA. If that's the last thing i your employer don't hav nothing, which is my case. Sa what you can and gradually tr to increase your saving rate a your earnings increase. Whateve you do, don't put it off. If yo have a match, and if th employer is gonna match you 5 you put in 5% of your pay, an the employer will match that 5 if you always use a percentage when you get a pay raise you Allah magically will be puttin more into your retirement. Mayb you can put in an extra 1% i you work two or three years, yo get a pay raise, maybe on increase from 5% to 6%, tha they'll be fine. Go ahead and d that. Maybe your employer an excrements is increasing th match. Be aware what's going o with your employer retiremen plan, and stay updated on wha they are doing, they will tel you pay attention. And if the say, if you work here for fiv years, our match goes from 5% t seven and a half percent, you contribution needs to move up t seven and a half percent o you're leaving money on th table, you're not takin advantage of the benefit the are offering you. And again, i you're an investor, when's th last time we took a close loo at your portfolio, I have a investment advisor, he take care of all that. I look i there to see what's going on. know last year, I had roughl about a 9% increase. That' pretty good. Since banks ar paying less than 1%. And I got return of around 9%. I'm happ and I just look at it from mont month I'll look at it See ho I'm doing. And also because m mark the market, you might hea the markets down the market down you know I'm losing mone and he might hear that fro other people. I go into m portfolio and my portfolio wen up a half percent. Why? Becaus the versified Make sure you investments are diversify you spread out all over the market and you got your money all eve out and every place it goes som parts of the market might hav been going up or parts movin going down. If you got your al your money in one basket. A that basket drops yours drop. I you guys 20 different baskets it's all kind of evened out an make sure you have the righ insurance have an adequat insurance isn't part o protecting your finances, healt insurance, most of those nee car and homeowners or rental insurance. While you're working Disability Insurance help protect your future earnings an ability to say you might want supplemental umbrella polic based on your occupation in ne worth, failing you shoul consider life answerin specially if you had dependents Insurance is up to you th Disability Insurance whil you're working. If you're th only person working in you family, you your spouse and you children. And if something woul happen to you, whether ou playing at home, on vacation, o at work, disability insurance we generally kick in and giv you some earnings or some incom while you're off. There's shor term disability that goes start maybe a week after you'r injured up to six months, the there's short term that won' kick in until after six months I had this because I was sel employed for a while. And I jus kept paying on I was a coupl $100 a year when I want to wor for somebody else. I just kep paying for it cheap. Then I go sick. And I had a major diseas and I was off seven months, called up my insurance compan told them what's going o provide them with everythin they want it. They got back wit me and said, When are you goin back to work? I said next week or next month, I think it wa about a month before. And the made a settlement with me. The said we're gonna pay you amount of money or you'r willing to take it and I said Well, a little bit more wouldn' hurt. Nice it Okay, I'm no giving you numbers because don't remember what they were But basically, it got me throug a tough time. And I then kep paying on that. And then when hit a certain age, I got rid o it because their benefits star dropping. So again, it's knowin what the insurance does an what's in their insurance an know your tax situation. I don' have a problem with that becaus I do my own tax returns ever year. My wife self employed, make sure there's estimate payments I make sure the cit and state is taken care of. know my tax situation because used to do that for a living But you maybe you don't mayb you forget maybe once a year yo go you have your taxes done, yo pay whatever and you're Forge it. Well sometimes you migh have to make estimated payments And if you forget to mak estimated payments, you could b subject to penalties. So mak sure you do that. Then at th end, you need to have an updat in a state plan. And part o this is a will your state wh gets what when you die an advanced Health Care Directive What do you want to do if you'r on life support How long do yo want to be on lif support? Do you want to be plugged in, and then a comma for 50 years? Or do you just want to be unplugged and if survive, you survive, you don't you know, these things you need to know and have people who know, powers of attorney, somebody who can take over your finances and healthcare. If you're unable to do it, you need to have a attorney to do this, the more prepared you are, when something bad happens, the better the outcome will be for everybody. I'll be back in one moment with my final thoughts. If you listen to this podcast using an apple podcast app, please rate and review this podcast. If you don't know how to rate and review within the apple podcast app, do a search even if you're already at reduced that increased wealth. You do a search when the search is done, you click on reduce that increase wealth, he then scroll down through the episodes and towards the bottom, you'll see write a review, you can rate the stars. If you click on write a review, you can write your comments and then click on the number of stars you wish to select. financial plans are not that difficult. They will help you stay on track. And if you're not on track, they will get you on track. You get a budget setup. You know what's coming in what's going out. It will benefit you for the rest of your life. Even when you get your spending under control. Even if you get all your debt paid off. You still need a budget. You still need to know what's coming in and what's going out every month through the rest of your life. Get it done. Set it up. It doesn't take long. I got in my show notes where you can go or you can Google it. DIY financial plans, DIY personal financial plans. There's plenty of help on the internet, mostly from financial planners. Get started today. Get your life under control and you'll be happier for doing it.