Personal Financial Planning for Beginners

Financial planning at 8, 18 or 80

Whether you are eight, eighteen or eighty years of age, you can learn personal financial planning, as a beginner. (1) It is never too early, or too late to start.

A parent, familiar with and practicing financial planning, may start his or her child on a basic, financial training program, at an even younger age. A young child must learn how to handle money, even when it is only a small amount allotted to him or her. Does your child have a piggy bank? Saving pennies is a good place to start.

An eighteen year old should already be actively engaged in financial planning with respect to his or her needs, including ongoing education leading towards a future career. He or she should have an eye towards possible marriage and a family. If not, it is never too late to begin personal financial planning.

An eighty year old may suddenly be alone after the loss of a spouse. Perhaps only one partner in a relationship has handled the finances for both, throughout their lives. The surviving spouse must learn to become financially independent, by learning personal financial planning.

Personal financial planning involves two basic elements, money that comes in and money that goes out. Most people have some idea of what to expect in terms of actual income, but may not know what they spend on a weekly, monthly or yearly basis.

An eight-year old child knows that he or she can expect a certain amount of money, as his or her allowance. An eighteen year old generally knows what his or her income from parents, jobs, student loans, etc. will be. As long as an eighty year old is healthy, he or she will probably be aware of what his or her income is from a retirement pension, other kinds of pensions, savings, disability income, interest on savings, etc.

Keeping records of one’s income streams is important, regardless of a person’s age. It is generally possible to keep a written record of the actual income one has coming in on a regular basis. Even a young child that can read and write can do this.

There may be both active and passive income streams that need to be up-dated regularly, as income flow can vary. This is also important for income tax purposes, as every adult is required to report his or her income on an annual basis.

The easiest way to keep a record is to use a budget book, notebook or computer program. A regular record should be made of actual or anticipated income. As income is documented, this becomes an ongoing record. If a child can do this, so can an eighteen year old or an eighty year old.

A budget book can be set up in separate columns representing each source of income and a total income at the end of each week, month or year. For example, a child who receives an allowance can keep one column for that, another for income he or she earns cutting the grass, babysitting, etc. and a third one for money received as gifts. Parents can assist to calculate the totals. Documenting each income stream separately and totaling them individually, as well as together, allows one to see what each source of income actually is and how it compares to other ones. In other words, for a child, how much is the total allowance received. How much is the total for income from earnings or from gifts? Of course, this becomes more complicated for an eighteen year old and an eighty year old, but the basic principle is the same. Document each income stream and keep a running record of the total income coming in.

Keeping pay statements, or other records of income streams makes them verifiable, so learning how to use a filing box, or filing cabinet is important.

That is the easy part of personal financial planning.

It is generally more difficult to keep records of outgoing income. Have you ever come to the end of the month and did not know where your money went? That happens to children, as well as young and older adults. The most important thing is to keep accurate records on a weekly, monthly and yearly basis of what is going out as income spent.  

A child can keep a record in the same notebook he or she uses for incoming income. The record should include a documentation of money spent, saved or put aside for special projects, like buying a new bicycle, birthday presents, etc. Children do not usually have fixed expenditures like an eighteen year old or an eighty year old. An eighteen year old probably has both fixed and variable expenses. Perhaps he or she has car payments to make and insurance coverage for his or her vehicle. Maybe he or she has already begun to put money in a bank account for buying a house. An eighty year old would be looking at both fixed and variable expenses with respect to his or her home, or a retirement home.

Fixed expenses will vary from individual to individual. Keeping accurate records of these is important, as they involve living expenses, like mortgage payments or rental in terms of housing. They may also include property taxes, heating with gas or hydro, car payments, home and vehicle insurance, etc.

Variable expenses may change from week to week. These include things like food, clothing, transportation, entertainment, gifts, gas, etc. Keeping an accurate record of variable expenses allows one to see where his or her dollars are spent. No one can keep a perfect record of every thing in his or her mind, so writing the amounts that are spent is important. Retaining receipts helps a person keep an accurate record that is verifiable when necessary.

Avoid credit cards. Most people are not aware of the amount of interest that they have to pay on credit card purchases and thus it is usually wiser to avoid the use of credit cards completely. Avoid using debit cards too, as they can be too convenient and tend to be overused. If you spend only cash, you know immediately what you have spent and what you have left to spend. Regardless, keep a record of every financial transaction.

It is said that ‘it is not what you earn, but what you spend” that determines your financial status in life. It might be wiser to suggest that it actually is ‘what you save’. If you spend more than you earn, and save nothing, you immediately enter into a debt situation that may involve paying high interest rates in terms of debt repayment. Paying interest on interest is never advisable, so paying off one credit card with another, is not a good idea either.

Tithing ten percent is a basic Christian principle with respect to financial management. A good rule of thumb is to save ten percent of each amount of income that comes in. Another ten percent should be set aside for financial emergencies.

Balancing one’s budget means maintaining a situation where one’s finances are always in the black and not in the red. In other words, one has money in the bank and the bank account is never overdrawn. Counting and saving pennies invariably leads towards counting and saving dollars.

Learning how to budget helps a person keep his or her finances in order, regardless of the age of the person who is budgeting. Planning ahead to meet basic needs avoids a panic situation at some time in the future.

Financial planning is not that difficult. It can be rewarding as a person watches his or her bank account grow. Placing needs before wants or desires is always a good rule of thumb to follow. Being aware of trends in the economy is also important too, as interest rates fluctuate from day to day, week to week and year to year. Know what the value of the dollar is and what it means when it rises or falls.

As a rule of thumb, purchases should be with an eye to the future, recognizing the reality that there is an extremely high markup, on many items. Many things go on sale with up to seventy percent reduction. Shopping carefully, in a wise and timely manner, makes a huge difference with respect to personal finances.

Talking to a bank manager or financial counselor about investing in stocks, bonds, educational savings plans or other kinds of savings plans including retirement savings plans, will help set guidelines with respect to saved money that could be generating or earning passive income.