Does this sound like you, “We don’t have any money at the end of the month. We’re not saving enough or investing anything for retirement, and we’re going to be sending our daughter to college next year.”
Your money follows your personal interests. What you spend your money on shows what is important to you. So, if you change what is important to you, your spending will change with it. But how do you begin to make the changes you want?
Wealth planning is a tool for you to create awareness for what you want in both your personal and financial life. Wealth planning should not be viewed as a weapon to punish yourself for spending money. Instead, it is a process to become acutely aware of how we are spending our money so that we have enough for the things that matter most.
Here are five steps that you can take to begin making the changes you want in your personal and financial life;
Now let’s break these steps into actionable items that you can accomplish.
The most important part of your wealth planning journey starts at the beginning, and that is deciding what is important to you. This is best achieved by carving out time to be alone and truly think about what you want to do.
Just like a company or business has a set of financial statements, every individual and family has its own set of financial books as well.
Income Statement/Spending Plan
Your income statement is essentially your spending plan. You have money coming in from what you earn, and money going out by the things you spend/buy.
I often tell people that the checkbook doesn’t lie. Where you spend your money will show you what is important to you. Change what is important to you, and the money will follow. Again, developing a spending plan shouldn’t be used as a weapon to punish yourself. It should be used as a tool to help determine what you are spending your money on and how to make changes.
I have created an online client portal for my clients in which they can sync their financial accounts such as checking, savings, credit cards, and loan balances to determine where their money is going. You can’t begin to make financial changes until you have a detailed understanding of your spending.
Mint.com is a similar tool that you can utilize as well as your monthly financial statements from your bank and credit card providers. Additionally, I have built an Excel tool that you can access here for free to help get you started.
Balance Sheet/Net Worth Statement
Your net worth statement lists all your financial assets such as a house, cars, bank accounts, retirement plans (401(k), IRAs, etc.). Additionally, you list all your debts or liabilities, such as your mortgage, student loan debt, car loans, and credit card debt.
When you subtract your total assets from your total liabilities, you arrive at your Net Worth.
You can increase your net worth in a few different ways;
The most successful wealth management plans involve savings, investing, and paying down debt to increase your net worth.
Now that you have identified your personal/financial goals and have built your personal financial statements, you can begin to pinpoint what gaps you may have in your wealth management plan.
You can only identify what your gaps are when you have identified what your objectives are and developed your personal financial statements. I cannot stress this enough.
A gap exists if you have a shortfall between your actual and desired outcome such as the following;
Once you have your gaps identified, you can now put together action items to bridge your gap.
For example, you may find through your spending plan that a large portion of your variable costs goes to eating out. Determine how you could scale this expense back, identify the savings it would create, and then how you would re-allocate the savings to one of your personal/financial goals.
Here are a few other ideas that may help in this process;
Paying attention to the “big stuff” might help you reach your objectives faster. Major life purchases will have a far bigger impact upon your wealth than saving some money at Starbucks:
Throughout the wealth planning journey, I have found three foundational elements to keep top of mind;
You will likely find that you can do most things in life, but you can’t do them all.