The basics of personal financial planning and your first financial moves
Key topic
In this lesson you will learn the process of creating a personal financial plan, some areas of which have already been discussed in previous lessons. You will also be presented with real life examples on how to handle your first financial moves.
Learning objectives
- Develop personal statements about your mission and legacy
- Start thinking about some of the questions that you will need to answer before creating your financial plan
- Discover the meaning of living within your means
- Be ready to pursue your first financial moves
Your mission and legacy
Your financial plan should be aligned with your mission in life and it should take into account the legacy you want to leave in this world. You need to decide on your mission before you start the financial planning process.
A personal mission statement will help you identify your core values and beliefs. Applying these core values and beliefs in your everyday life leads to the creation of your personal legacy, for what people will know you and remember you. By defining your personal mission, you will focus your energy on your personal priorities and goals and you will have more chances of achieving these goals. Your personal mission statement basically describes how you want to live your life. To define your personal mission, you need to do self- reflection; you need to focus on your values and give your own definition of a successful life.
Your personal mission statement should consist of a set of guideline principles that capture how you want to live your life. To come up with these guideline principles you need to answer the following questions:
- Who do you want to be?
- What are your core values?
- Who do you want to impact?
- How do you want to be known to people?
- What is your definition of a successful and fulfilling life?
These are tough questions but the answers to these questions will help you create your own personal mission statement, which will give you direction in the decisions you make on a daily basis. You should remember that your personal mission statement is not something you cannot change; it should be reviewed regularly and be adjusted so that it continues to reflect who you truly are and how you want to live your life. It is understandable that the mission statement you write today will probably not be the same you will write five years from now, or fifteen years later when you are already working towards a career. It’s okay to start somewhere and as you grow and mature, your needs will change, your opinions and the way you approach life will change and so will this mission statement.
Your legacy will be the way people remember you and the way you impact people around you, such as family, friends, the community and so on, a way to be recognized by others. By designing and creating your legacy, you will not only impact others positively, but you will also enrich your life in the sense that you will not let life just happen; you will be the architect of your own life, and design it the way you want. To design your life purposefully, you need to identify what makes your life “rich” and you need to give voice to the things that give meaning and purpose to your life. A real legacy is built on what you are giving to the world; it focuses on how you make the world a better place.
Being at a young age, you have a lifetime ahead of you to offer the best of you to your loved ones, to your community and to the world. You are most probably wondering how you should do that. There are a few questions that you can ask yourself; the answers will give you guidance on how to make a difference and leave your mark in the world.
Questions to ask yourself include, but are not limited to:
- Who do you want to impact and how do you plan to do that?
- What can you create that will have a positive impact on the next generation?
- What are the action steps that you need to take to make the above a reality?
After you have answered the above questions, you are ready to start mapping out your plan for creating your personal legacy; throughout this process you should always think in a long-term context, because a personal legacy is what you wish to give to the next generation and perhaps to future generations as well.
Creating your personal legacy is not a one-time deal; it is a work-in-progress. As you continue improving yourself, your awareness of your life purpose will increase; that will help you fine-tune your legacy building steps and include them into your daily life and your financial plan as well.
Let’s now watch a 4-minute video on writing your personal mission statement. Please pay attention to the video as you will be asked to follow the process described in the video, to write your own personal mission statement.
Action steps – Exercise 1 (7 minutes)
- Following the 5-step process described in the video we just watched, write down your personal mission statement. Please note that a paragraph should be more than enough! The purpose is to make you start thinking about these questions.
Living within your means
As we have already discussed in previous lessons, the best money management habit to adopt is to always live and save within your means. By adopting this habit, you are a step ahead in your financial game plan. Living below your means actually means that what you spend and save during a given timeframe, a month for example, does not exceed your available income.
Living above your means is when you spend more than your available income; usually that happens when you use credit and you get into debt. Remember that consistently living above your means builds up debt which can prove to be disastrous to your financial game plan. This is one of the worse money management habits to have and it should be avoided.
Living exactly within your means is when you spend all your available income on needs and some wants but you do not save any money at all. Basically, this translates into “living for today”, with no financial planning for the future. Even though no debt is created in this case, it leads you to a dead-end situation. Learning to live and save within your means and knowing how to manage money, are some of the most important life skills you will ever master. Adopting good spending habits and sound saving strategies will guide you towards a balanced and complete life.
Now, let’s watch a 4-minute video on Financial Planning which recaps the financial planning concepts that we have learned so far during the course of these lessons.
Your first financial moves as a young adult
After you have analyzed the concept and meaning of all these financial terms, having appreciated the importance of financial planning, budgeting, setting a mission and a vision for your financial life, you will be faced with the execution of what you have learned.
Obviously, your first step will be to open a bank account and a savings account. Then you will be at a stage in your life that you will need to make a transition; perhaps a transition to college, or to pro-sports, or in the real world where you will drive your future, you will make the decisions, you will set the tone and pace for your financial success.
During this phase, you will probably need a car to drive and a house to live in. Large asset purchases usually come with both obvious as well as hidden costs, which you need to understand before you proceed with buying any large asset. The first large asset purchase for any youngster is usually their first car.
When looking to buy a car, you have various options that come with different price tags. New cars are usually more expensive than used cars. Also, the brand of the car is a major factor of its price; other factors that you need to look into are, the amount required for down payment, the interest charged on the auto loan, the monthly auto loan payment amount and the timeframe it will take to repay the loan.
When buying a car, you need to balance the need and the want. You are buying a car for your daily transportation needs which represents a necessity. At the same time though, you want to buy a car with which you can experience the ‘driving pleasure’. Given your budget, you will have to balance these two competing forces and decide on a car, which will satisfy the basic need of transportation first, and then the driving pleasure aspect. You will have to bear in mind that a car, no matter the brand, loses a great portion of its value once it hits the road. Therefore, you need to be practical and choose an affordable and reliable car.
Before entering into any large asset purchase you should always identify all the costs associated with such a purchase, to see if you can actually afford it. When buying a car, you should consider the additional car related expenses that you will incur every month in addition to the monthly auto loan payment. Potential expenses include gas, insurance, registration, road tax, maintenance etc. After you have estimated the monthly cost of the above expenses, you need to add it to the monthly auto loan payment and this will represent your total monthly cost of owning a car. Once you calculate this figure, you will have all the relevant facts to make a decision as to whether you can afford the car or not. Remember to check your budget and make sure that the choice you make is compatible with following your budget and living within your means (if not under).
In a few years, assuming that you are still at a point where your career is uncertain, your field of professional activity is unsure (therefore the size of your income unknown) and your geographical residence yet undetermined, it is perhaps safer to avoid buying a house and perhaps rent one. The cost of renting an apartment or house, will probably represent the biggest expense in your monthly budget. When deciding to rent a place of your own, you need to make sure that you can afford the monthly rental. The basic monthly rent payment is not the only cost involved when renting a place to live. There are other expenses which are not included in the monthly rent payment and should be added to your monthly expense budget.
These expenses include gas and electricity, water, sewer and garbage collection costs, renter’s insurance, repairs and maintenance, internet and cable TV subscriptions. In addition to the above, you will probably need to pay an upfront cost for buying furniture and appliances, depending on whether the apartment is furnished or not and whether you can live with what is made available by the landlord. You will also have to put down a security deposit for the apartment, which will cover a couple of months’ rent at least. All of the above, add up and if you do not take them into account when preparing your budget, you might end up in an unpleasant financial situation.
Action Steps – Exercise 2 (10 Minutes)
- Describe where you want to be financially at the age of 25
- What do you think you need to include in your financial plan to reach your financial goals set for the above milestone?
Lesson wrap-up
Today’s lesson was much more interactive than usual. Instead of giving you a lot of new information, we tried to make you think about your future financial planning and the things you need to ask yourselves before drafting it. We explained why you need to have a mission which aligns with the legacy you want to leave and what living within, above and below your means is. Finally, we explored what your first financial moves might be and what they mean.
At this point we will wrap up today’s lesson. First, we will go over the learning objectives of this lesson and we want your feedback as to whether they have been achieved and then we will address any questions you may have. Please feel free to ask anything you’d like in relation to today’s lesson and we would love to hear how the concepts we discussed today relate to you and your life!