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Posted on February 5, 2019

Personal Financial Planning Seems So Complicated – Where Do I Start?

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By Jeff Pesta

My first lesson in budgeting came with a paper route when I was twelve. I knew my upfront costs of paper and other supplies, as well as taxes, so I subtracted that. Then I worked out a regular contribution to my car fund for the moment I turned sixteen. Finally, I left myself pocket change for the arcade and the movies. It’s a simple example, but my first paying gig taught me how a financial plan works – to budget for materials, pay myself and then trust that I would have some “walking around” money left over.

Even the most complex financial plan is simply building blocks on these basic concepts. Let’s look at a few of the foundations for a personal financial plan.

Start with Your Budget

Often times people want to look at their bank statement and create a budget from current expenses and income. But I’d say the best way to create a personal financial plan is to start with the amount of money that you make in a calendar year. Then I would subtract from that 10 percent for retirement. So, if you make $100,000, the first $10,000 should go to savings for retirement.

After all, the whole idea with the retirement plan is that while you’re working you set aside 10 percent per year, so that when you stop working that money that you set aside every year earns enough to replace all or a great portion of the money you were making while you were working.

Check out the Retirement Readiness Quiz to see if you’re on track.

Uncle Sam Gets His Due

Now for an unfortunate side note. If you live in California you should next deduct 20 percent for the federal government and 10 percent for California income tax. Did you see what happened there? 30 percent just disappeared on top of the 10 percent you were already saving. 40 percent is gone! Maybe the income tax in your state is cheaper, but Uncle Same will always get his due somehow.

This is why we overspend. We think a hundred grand – that’s 8 or 9 thousand a month. Then we spend accordingly. Yet in reality that 30 percent for taxes was taken out automatically and never appeared in our wallet to begin with! It’s unfortunate, but I see it all the time.

Back to the point, when you create a personal financial plan this way, then you’re able to save first, and that makes avoiding spending easier. Out of the gate in the first month that you are paid, in the first week that you’re paid, you already have savings so you already feel accomplished.

Essentials – First Things First

Next, you should add other essentials like food, transportation and insurance, most importantly life insurance. Now why do I say most importantly life insurance? None of the things that you’re going to accomplish over the next 30 years of working can be done unless you have that income for those thirty years. In the off-chance that you died before you work the next 30 years, the life insurance is intended to replace what you would have saved. Life insurance should be calculated to cover things like paying off the mortgage, saving enough money to pay for a retirement income, paying for college for the children and other big ticket items.

Now that you’ve accounted for retirement contributions and other essentials – food, housing and insurance – you hopefully have a little left in your monthly personal financial plan. You’re down to the things you want, but that aren’t necessary for daily life for you and your family.

Watch the “I Want” Problem

You shouldn’t have a situation where you’re out of money before the month ends. If you do run out, that means you want more than you need. You don’t have an income problem, you have an “I want” problem – and that’s something you can work on.

Think about non-essential items in your budget – one simple example is cable TV.  My wife and I had cable, but found we were able to get what we need with Netflix, Hulu and Amazon Prime. We get the shows and movies we want for substantially less, and were able to drop the cable. It wasn’t easy at first, but we got used to it!

Let’s Sum It Up

So, to sum up the lesson I learned from my newspaper days:

  • Percentage to Uncle Sam – Taxes are never going to change and luckily come out of your check automatically so you don’t have to think about it too much.
  • Percentage to retirement – This is the money that’s going to work for you and support you after your paychecks quit coming.
  • Percentage to essentials – Food, shelter, clothing, and remember that life insurance essential. If you were to pass away, are your loved ones covered?
  • Percent to pocket money – Non-essential expenses may not be necessary to stay breathing, but they do make life worth the trip. Entertainment, arts, hobbies and vacations will find their way into your budget, just engage them creatively like my cable TV example above.

Creating a budget this way can be very rewarding. If you find yourself challenged to save – especially for retirement – then it’s probably time to make an appointment to see a professional and do it together.

Learn to make budgeting a game you can win. Get in touch with us at Pesta & Pesta, and let’s set up a meeting today.

Let’s talk!

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