Money 101: A Basic Financial Plan For Those Starting Out

If you subscribe to the do-it-yourself approach to managing money, then we’re on the same page. Many people have asked me through the years the same questions: What should I do with my money? Should I borrow more and build my credit? How do I invest what I have? How did YOU create your financial plan?

For me, it all started right after I got my first job, with my mother handing me a book called Making The Most Of Your Money by Jane Bryant Quinn and some other book that covered financial topics and concerns for people under 30. The title escapes me now, but it was geared toward the younger crowd. But when all this came to pass, there was no internet so I gleaned all my information from books, magazines and periodicals.

After my first few readings, I was inspired to get myself started with a *very* simple plan. By tackling these matters, I was confident that I was establishing the foundation I needed to get myself on track with my finances. The basic financial plan that I worked out for myself is rooted on the following points:

Personal Finance Planning Basics: Make Your Own Financial Plan

1. Pay off all debt.

   I’m the type of person who prefers to have no debt whatsoever. It’s no surprise then that I would advocate trying to get rid of debt as much as possible. But if you have it, then try to get rid of the bad debt before the good. Bad debt involves high interest, prepayment penalties and depreciating property. Good debt has tax advantages, low interest and covers possibly appreciating property. So borrowing to buy a house is typically good financial sense, while borrowing on credit cards would be something to avoid.

   I try to pay off my credit cards in full each month and if I notice I’m unable to do so, I stop buying stuff I don’t need. It’s darn tough though!

   Some people use good debt as a financial strategy for getting rich — what is otherwise known as getting rich with OPM (other people’s money) or using leverage. Really study your options before going down this route due to the risk it entails.

   My story: I’m looking into using some leverage to enter the real estate investing game. The pros: great, incredibly low interest rates, deflated property values. The cons: holding debt is always risky and many folks have discouraged me from going down this path. But we’re paying down our mortgage very soon and we’re already in a better position than we were during the recent real estate mania. What a difference a few years makes!

2. Adhere to a budget.

   The nice thing about budgets is that it’s something you make up. I’ll be honest — I’ve never really “budgeted”. The most basic way I would save money is by going without (also called “abstaining from spending”). Throughout the years, I’ve typically cut back on travel or new things. I love accepting hand me downs, and a car will usually last me 6 years, at the very least. But budget? It’s for informational purposes only. Now as I navigated the years, I found myself doing reasonably well as somehow by “doing without”, I found some extra money to invest in the 90’s bull market. Steady contributions did more for me than watching a budget like a hawk. But I don’t discount the power of setting boundaries either. Budgeting has worked well for many people.

   Tip: If you are interested in a great budgeting tool, check out YNAB (You Need A Budget). They’re ranked very well compared to other budgeting tools out there.

3. Start an emergency fund in a savings account.

   After getting rid of bad debt, set aside some amount, typically 6 months’ worth of living expenses (or more) for the proverbial rainy day fund. In case of emergencies, use the funds here to bail you out. There are those who don’t have such funds and decide to use their credit cards as backup and the money they would otherwise use for emergencies is spent elsewhere. During the 90’s bull market, I even knew people who would shovel all available cash into the stock market; they rationalized that the risk of an emergency is worth covering with a credit card and the money would be better off growing in an equity account somewhere. Those crazy market years are long gone, but the traditional advice still rings true.

   The bottom line is that I keep my emergency fund in a stable, liquid account, say in one of the best high interest savings accounts available. Who knows when you’ll need it? Don’t get caught scrounging for cash once a tree crashes on your house!

   Tip: Check out EverBank, FNBO Direct or any other online bank or credit union that offers better yields compared to other cash options. Often, these online banks have lower fees and higher rates than traditional brick and mortar institutions.

4. Don’t pass up free money!

   Take advantage of all benefits and financial breaks that are available. If you have a generous employer, then use all the employee benefits that you are entitled to. Check on your company benefits and take advantage of them. Perks such as a 401K plan, insurance plans, health care coverage, ESPP (Employee Stock Purchase Plan) and such can add up to 10% to 25% of your salary. Some even have employee tuition reimbursement programs. So don’t let these juicy benefits go unused — start contributing to your 401K plan today! In addition, be aware of what the government has made available to you: if there are tax shelters you can use and tax breaks you can take based on IRS guidelines, then find out what you qualify for. Don’t pass up free money.

5. Discover your financial profile.

   Suppose you’ve got the basics down and you’re successful about maintaining a zero balance in your credit card accounts, plus have enough stuff saved up for short term needs. Then you’re ready to start investing. Before delving into investing, know what kind of investor you are first. Take some quizzes, answer some questions and determine your comfort level with investing. The more you know about how much risk to take, the better you can keep with an investment plan. Fiscal discipline and resolve will come into play especially during tough times when the market goes wild.

   Tip: For some people, knowing their financial profile actually means analyzing their behavior towards money. You may ask: am I a spender, debtor, saver or investor? Knowing your strengths and limitations can be the first step towards improving your financial picture.

6. Know your financial goals.

   What would you like your money to do for you? Aside from paying for your day to day living expenses, survival or even luxuries, if you’re like most people, you’d like to figure out a way for money to cover the big ticket items that we all dream of having. For most people, they’d like money to:

   • Buy them a house.
   • Plan for their children and their schooling.
   • Build their retirement nest egg.
   • Grow indefinitely (no real concrete goals here).

    
   If you know what you are saving and investing for, then you’ll be able to determine what kind of investments to get into. Service your short term goals with short term vehicles such as money market funds, liquid or no-penalty CDs, CD laddering, and short-term to medium-term bond funds. Long term goals can be addressed by stock funds, equities, long-term bond funds, REITs and more aggressive investments.

   Unfortunately, not everyone is capable of setting money aside for funding all these goals. Sometimes, you’ll need to make tradeoffs. But I believe it’s a great thing to hold on to a dream. Life has a funny way of working out those dreams.

7. Invest in a diversified portfolio.

   Once you’ve earmarked investment funds, then look into equities, bonds and real estate. Once you know what you are investing for, then you can start choosing what types of investments to get into. I’d start with index mutual funds. Get into more advanced investing only after you’ve gained some investment experience and have survived through a few market cycles. I prefer to keep it simple and am quite happy with tracking the indexes through various mutual funds and ETFs (exchange traded funds). Real estate will require more money and mettle (unless you are using REITs). Try that once you have more capital to work with.

Of course, there are other financial matters to be aware of: for instance, having enough insurance, knowing how to optimize your taxes and creating an estate plan should also belong in a basic plan, but most people starting out don’t occupy themselves with these matters right away, especially if they already receive medical insurance from their employer. But at some point, you’ll want to delve into these issues as well.

So this is how I mapped out my future in my 20’s. Once you’ve got your own plan, then it’s all a matter of execution! And there’s the rub. The good news is that for many of us, there are several decades or even an entire lifetime to put such a plan into action.

Created November 1, 2006. Updated February 19, 2012. Copyright © 2012 The Digerati Life. All Rights Reserved.