Are you a saver or a spender?

Over the years I have helped many clients develop financial plans. These plans often cover some basic areas such as cash flow, investments, net worth, tax planning, risk management, income planning, estate planning, college funding, and retirement planning. No doubt, every one of these areas is important in relation to the financial planning process.

There are generally two types of people

As a CFP®, early in my studying years, I learned a key element of a financial plan deals with your financial habits, and in that area there are generally two types of people— savers and spenders. There are those who spend first and save what is left, and those who save first and spend the remainder. If you want to accumulate wealth, learn to become a saver.

I recently met with a client of mine named Ed who has been retired for fifteen years. Over the years I have gained a lot of wisdom from him. He once shared with me his greatest financial secret in life: “Lean on God during the highs and lows, watch what you put in your mouth, get plenty of exercise, and always put a little aside.” It seems so simple, yet here he is in his late seventies, acting younger than clients I have who are in their forties. He gets it!

A successful retirement is not just about money. It is about the triad of health: your spiritual health, your physical health, and your financial health. It doesn’t matter how much money you have when you retire if you have poor health and no relationship with God. There is nothing complicated about a plan that calls for having faith in God, eating right, frequent exercise, and regular saving.

Do You See the Bigger Picture?

By examining your financial picture it is easier to create strategies that will enable you to stay on track with your financial planning process. A financial plan will provide the needed framework to help you become and continue to be organized. Think of this as your financial blueprint. If you were building a house and had no blueprint, your house would most likely have many problems. But with a financial plan, you can create a blueprint that neatly lays out a plan for future financial success. If you make the decision to meet with a financial professional, the process of creating a blueprint will begin with looking at your past, current, and future financial pictures.

No plan is worthwhile without goals that personally mean something to you. Your goals should be based on needs rather than just wants. You may sometimes allow greedy intentions to get the best of you. When you learn contentment, you often begin to set goals that focus on your greatest needs rather than selfish desires. With financial freedom being a goal of many, setting proper financial goals will help you move in that direction.

Set It and Forget It?

Setting goals is a very important part of life in general and of financial planning in particular. Before you actually invest your money, you should spend some time considering and setting your personal financial goals. For example, do you want to retire early? Would you like to start your own business soon? Do you need to pay for your children’s college educations? Would you like to buy or build a new house? Would you like to fund a ministry project or help a worthy cause?

In addition to these, there are several other questions you should consider to develop an appropriate financial plan. First, what is your time horizon for your goals? Second, what is your investment risk tolerance? Third, what are your liquidity needs? Finally, what are the most appropriate investments to help you achieve your goals?

Start by setting your goals, and don’t forget that you cannot make progress without revisiting these goals periodically. Most people do not begin because they do not know where to start.

Your financial goals typically can be separated into three main categories: assets (savings and investments), liabilities (debt), and cash flow (income and expenses). I will briefly cover some simple guidelines in each of these areas to help you get started as you ponder your personal financial goals.

Asset Creation Goals

This is where wealth creation happens. An asset is something you purchase that has the ability to go up in value and provide income. The goal for most faith-based millionaires is to increase assets so that they can produce more income to help more people. Do you follow the logic that an increase in assets increases income, which increases the ability to give more to help those who are less fortunate?

If you are trying to save more, start or add to an existing emergency fund. Take some time to learn about different savings vehicles. You can also learn ways to minimize taxes on your savings. The bottom line is to develop a process to maximize your savings returns.

After a hard day at work, do you ask, “When can I retire?” Retirement may seem a long way off, but it’s never too early to start planning— especially if you want retirement to be the purposeful life you imagine. Retiring to something purposeful takes planning. The earlier you start, the sooner you can make it happen. You may also want to send children or grandchildren off to college. Estimate how much it will cost. Think about how you might resolve conflicts between goals. For instance, if you need to save for your child’s education and your own retirement at the same time, how will you do it?

You should start saving for your future today. It is never too late. Fund your retirement accounts—maximize 401(k)s, traditional IRAs, or Roth IRAs. You should seek to develop wise investing habits and rebalance your portfolio at least once a year. Create financial goals to help you increase your wealth by increasing your assets.

Liability Management Goals

Liabilities are items that require you to pay back principal and/or interest. These include your various financial obligations. The amount of a liability is the balance remaining to be paid. Buying on credit increases your total liabilities, while paying debts decreases them. Unless liabilities are creating income or building your asset base, you should seek to minimize them. Examples of liabilities include loans, mortgages, and credit card balances.

If you are trying to reduce debt, you can develop a plan for paying off your credit cards. You can create a budget if you don’t have one. You may also want to pursue spending strategies that will stretch your dollars and help you live within your budget. Another wise choice is to pay a little extra on your mortgage principal each month, if you are able.

Cash Flow Goals

Cash flow is simply the amount of money coming into and going out of your household on a monthly basis. Your financial goals should seek to minimize money going out (expenses) and maximize money being paid to you (income).

Income is something that is paid to you generally in the form of wages, dividends, or interest. Money, gain, or anything of value that you receive from whatever source generally is included in your income. Income can come from passive or active sources. If you work and receive any form of compensation, this is active income. It requires your action. Passive income, on the other hand, is derived from your investments (real estate, stocks, bonds, etc.). When your passive income exceeds your active income, money is working for you instead of against you.