In the previous blog, we have described the four step process of financial improvement.

Whether you are in a state of uncertainty or disarray with respect to your finances, the four step process will take you to a Financially Happy state.

Let us revisit the four steps so that we know the context of this post.

• The Financial Reboot
• The Financial Plan
• The Financial Flow
• The Financial Growth

The Financial Reboot is the step where you take a hard look at your current finances and the eight numbers. Through these eight numbers, you can know where you stand (like your financial coordinates) and what your strengths, weaknesses, opportunities and threats (S.W.O.T) are. For more details on this step, read the blog below.

Today we are going to discuss the Financial Plan step.

Why do we need the Financial Plan?

Yes, why do we need financial planning? What is the use of this goal setting?

Isn’t financial planning simply about spending less than you earn, saving and investing the rest?

True, that’s what it is – wealth building in the simplest terms.

Only problem is that very few people can do it, and do it consistently.

It is like fitness – eat well, sleep well, exercise and be happy.

But how many people do it on their own?

If that was the case, then there would not be any need for nutritionists, doctors, fitness coaches, gyms, mental health professionals, spiritual gurus. Nowadays, you can find even “posture” coaches and “find yourself” coaches.

Financial planning is also something like that. You can definitely do it yourself, but it is not easy in all situations. Imagine the below situation.

You have $50,000 in your bank account. You also have the following in mind.

• You have to pay off a debt of $5000.
• You have to save up for your kid’s education, due to start in 4 years.
• You have to repair an issue in your home that is bothering but not urgent.
• You want to travel internationally to see family and do some business there.
• You are also thinking about increasing your investments outside of 401k.

So given above circumstances and goals, what is the best allocation for the $50,000?

Even if you do not have the $50,000 spare cash, how will you use your paycheck?

It is not so easy, right? We have to take a structured approach towards allocating our money.

Money and Time are both resources, and hence we have to use them the right way.

What is the structure of a Financial Plan?

Before we tackle all the different circumstances and goals we discussed in the above example, let me establish a method to solve this problem.

SMART goals are a well known technique in the productivity circle. When repurposed to Financial Planning, it means the following.

S – Specific. What amount do you need for this goal?

M – Measurable. What can you measure for progress towards the goal?

A – Actionable. What consistent action(s) can you take to achieve this goal?

R – Realistic. Is the goal realistic, given your current income and other constraints?

T – Timeframe. What is the timeframe to achieve this goal?

I added one more component to this popular framework to make it SMARTY.

Y – whY. Your why (compelling reason) for achieving this goal.

The Y is very important to prioritize between multiple goals and to call your value system to decide for you, rather than emotionally or by someone else externally.

How do you start with SMARTY?

Let’s take the above goals and apply SMARTY to 1-2 goals.

We have $50,000 and a monthly surplus of $1000 after all expenses.

• You have to pay off a debt of $5000.
• You have to save up for your kid’s education, due to start in 4 years.
• You have to repair an issue in your home that is bothering but not urgent.
• You want to travel internationally to see family and do some business there.
• You are also thinking about increasing your investments outside of 401k.

Use the Y first to pick 3 goals. The Y should tell you what resonates with you emotionally and rationally. For example:

• Emotional – Saving for education may be more important than the non-urgent repair.
• Rational – Finding out the interest rate charged on the debt and prioritize it if > 10%.

Let’s say by applying your Y, you pick the following 3 goals.

• Pay off the $5000 credit card (APR > 20%) as soon as possible.
• Save for kid’s education, due in 4 years.
• Travel international to see family and long term business opportunity.

Now we can randomly assign the $50,000 in this way.

• $5000 pay off credit card debt.
• $40000 save into a 529 account.
• $5000 use for travel.

You may think that putting $40000 into the 529 account is okay, but are you looking at an opportunity cost of not allocating to other goals?

What if, on your travel you run into a lucrative investment which requires $10000?

Since the $40000 stuck in 529 account cannot be withdrawn without penalty, you have to either let go of the deal or use credit again.

On the other hand, allocating $30000 may seem inadequate for the college fund.

Applying the SMARTY way

Let’s take each goal and break it down into the SMARTY format.

The Y part is already established, but you may have different levels 0, 1, 2 of priority.

• Paying off debt is simple in this case. Just pay if off from the $50,000.
  • Else set an action of using the $1000/month surplus to pay if off in 5 months.
  • S = $5000, M = $1000, A = setup an auto-pay, R = yes ($1000 available), T = 5.
• College fund. Here we will need a bit of homework.
  • Find out how much money will be required for the degree. S = $70000.
  • How much time do you have T = 4 years = 50 months (to simplify calculations).
  • M = $1000 per month savings will get us to $50,000 without any gains.
  • A = Allocate $20,000 now and setup an auto transfer of $1000 per month.
  • R = Realistic. Yes, you have the surplus needed and $1000 per month.
• Travel. Now we are left with ample cash $25000.
  • You can do a similar calculation for your travel costs.
  • S = $10000, M = $10000 (now), A = book, R = yes, T = now.
  • And you have $15000 that you may keep for any opportunity.
• You may come back and the remaining funds can be used for other goals.
  • Use $5000 for the home repair which had been bothering you.
  • Use $10000 in your 401k for your future goals like retirement.

Conclusion

I do this all the time with my clients. Everyone has multiple goals, needs and desires.

The peace of mind and happiness when you plan this way, is the immeasurable part.

I had coached a client who was not able to make an important travel with family, fearing losing a part of his savings that he so wanted to save for his children’s education.

This type of analysis opened his eyes that both are possible. Within an hour of finishing our session, he went ahead and bought the tickets.

If you or someone you know need help planning their finances, I can be reached at:

Email – info@startyourfinancesright.com

Money for happiness is my mission.