Five Financial Planning Fundamentals

Five Financial Planning Fundamentals


The order of these is not always constant and can be prioritized differently for each person. This order is typically how I lay it out initially and change it for the exceptions later on in the planning process.

The budget is the foundation of any financial plan. Without this component they rest will not occur. The budget is the simplest concept when explaining it, but the largest pitfall for more people. The budget sets up the limits of what you spend and how you spend your money, and does this within the income that you earn. If you spend more than you earn you will not have an Emergency fund, Retirement fund, Security in place, or a Legacy to leave. If you are just starting to pay attention to your financial condition please spend the most time internally reflecting on your income and expenses. This will do more to get you to financial freedom than any other task or focus.

Once you have your budget in place you need to save an emergency fund. This should be at least 3 months worth of expenses. I would round this number up some, so lets say your expenses are $2,500/month than I would say your emergency fund should be at least $7,500, but a better amount would be $10,000. If you stay in that range than you have bought yourself some time if something disrupts you income/expenses in the future. This fund will be in place for a layoff from your job or vehicle replacement. Do not go out and buy a vehicle with this money as soon as it gets to $10,000. If your car works keep it. I will discuss this more in a future article.

Whenever someone thinks of financial planning retirement comes to mind. This is because most of us do not want to work for the rest of our lives. Unfortunately we typically are not willing to sacrifice now for the end game. Retirement is a worthy goal that gets underfunded. Most people do not even have a number in mind for how much they need and at what age in order to retire. You can typically rely on getting between 5% & 10% out of your retirement fund once you retire. This is based on the investments and your life expectancy. So, first figure/guess what your income/lifestyle will be the year before you retire. Then multiply that by 10 – 20 time to get a ball park amount. This number is affected by taxes and any expense changes that may occur once you get to retirement, i.e. House paid off, more medical bills, traveling more, social security, etc. Go through this process and you will be ahead of a vast majority of your peers.


When I say security I do not mean alarms and gun. I do mean protecting your family, property, and your self from financial losses. This includes all of the common insurance policies health, life, disability, long term care, car, home owners, renters, etc. Each of these serves a unique purpose in each situation. Most of them are self explanatory, but a few have large implication on your financial position once you have built up a retirement account. Long Term Care insurance for example, can be used to pay for long term care, but you need to know what net worth types of people need this. Once you have let’s say $1,000,000 it is not as critical as someone with only $300,000 saved. This is because the millionaire can probably afford the long term care facility for an extended period of time without depleting the $1,000,000 even if it takes $70,000/year to pay the LTC. Clearly the person with $300,000 will use most of their saving in only a few years. Likewise life insurance policies can be used to pay estate taxes, avoid estate taxes or protect the family form losing their lifestyle if a death occurred to the income earner in the family. This will be cover more in a future article.


This is typically the last step in a family’s financial plan. This typically involves the transfer of wealth from one generation to the next. It can also deal with charitable giving and even avoiding the transfer of wealth to certain relatives. The options are numerous and vary drastically for each situation and the intent of the family. We will cover some of these in future articles

All of these aspects are encompassed in an financial plan. As times progresses the plan will change. This can be from the investment returns or the needs of the family/individual changing. Sometime the law or tax rules change and affect which action is the best to take. This is why at least an annual review should occur to ensure the best steps are being take to promote the appropriate goals.

Source by Justin Struble

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