Financial planning can seem overwhelming, especially for young families balancing competing priorities, growing incomes, and the demands of modern life. However, taking a thoughtful approach to managing your finances is essential for achieving your goals and living out your values. In this post, we’ll explore what financial planning entails, the various areas it covers, and the steps involved in creating a comprehensive financial plan.
What is Financial Planning?
At its core, financial planning is being intentional with your finances. Note, it is NOT stock picking, day-trading, or timing the market. Nor is it a sales tactic for some insurance or investment product. It is, or should be, a personalized experience that is tailored to your unique financial situation, your goals, and your values. For young Christian families, this often means considering not just the financial aspects, but also how your financial decisions reflect your faith and values.
Is Financial Planning Biblical?
It’s my belief that financial planning and stewardship go hand-in-hand. You may have heard this stunning statistic before, but there are over 2300 verses in the Bible on money and possessions! God knows it’s part of our lives here on earth, how tempting it can be as an idol, and how useful it can be when used for His will. Here are just a few verses on money and planning:
- Proverbs 21:5 (NIV): “The plans of the diligent lead to profit as surely as haste leads to poverty.”
- Luke 14:28 (NIV): “Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it?”
- Proverbs 27:23-24 (NIV): “Be sure you know the condition of your flocks, give careful attention to your herds; for riches do not endure forever, and a crown is not secure for all generations.”
- Proverbs 16:3 (NIV): “Commit to the Lord whatever you do, and he will establish your plans.”
- 1 Corinthians 4:2 (NIV): “Now it is required that those who have been given a trust must prove faithful.”
- 1 Timothy 6:17-19 (NIV): “Command those who are rich in this present world not to be arrogant nor to put their hope in wealth, which is so uncertain, but to put their hope in God, who richly provides us with everything for our enjoyment. Command them to do good, to be rich in good deeds, and to be generous and willing to share.”
God speaks to the wisdom of planning and diligence in how we handle money. Yet he also cautions us in putting our hope in worldly wealth or even in our own plans. As long as we continually yield them both to His will, prudent planning for our family’s financial wellbeing can be an act of stewardship honoring to God.
Key Areas of Financial Planning
Financial planning encompasses several critical areas. Each area plays a vital role in your overall financial health and stability. Each family’s needs are unique, but here are some of the key areas are covered as part of a comprehensive financial plan.
- Budgeting and Cash Flow Management
Effective budgeting is the foundation of any financial plan. This involves:
-
- Income Assessment: Start by evaluating your total household income, including salaries, bonuses, and other sources of revenue. See tips for budgeting with variable income.
- Expense Tracking: Categorize your expenses into fixed (housing, utilities) and variable (entertainment, dining) to understand where your money is going.
- Allocating Funds: Divide your income into five key areas: living expenses, debt repayment, taxes, saving, and giving. This approach ensures that all aspects of your financial life are covered.
- Debt Management
Managing debt is crucial, especially for young families who may face student loans, credit card debt, or mortgages. Effective debt management includes:
-
- Debt Assessment: List all debts, the balance, interest rates, and monthly payments.
- Prioritization: Determine which debts to pay off first, and create a plan to knock them out.
- Debt Reduction Strategies: Explore options such refinancing to reduce interest rates and monthly payments.
- Investment Planning
Investing is essential for building long-term wealth and is what most people thing of when they hear financial planning. However, investing is just one part of a comprehensive plan. Considerations in this area include:
-
- Risk Tolerance & Capacity: Assess your comfort level with volatility along with your need for risk to determine an appropriate investment strategy.
- Asset Allocation: Diversify your investments across various asset classes based on your risk profile and time horizon.
- Long-Term Goals: Align your investment choices with your financial goals, whether it’s funding your children’s education or preparing for retirement.
- Retirement Planning
Planning for retirement and financial independence is vital, even for young families. This area encompasses:
-
- Retirement Accounts: Be aware of the various types of retirement accounts and the tax-advantages and limitations for each.
- Retirement Goals: Define what a comfortable retirement looks like or how much you need to be “work optional,” and how much you’ll need to save to achieve that vision.
- Withdrawal Strategy: Plan how and when to withdraw from retirement or other investment accounts, considering tax implications, other income sources, and lifestyle needs.
- Tax Planning
Likely your largest expense, effective tax planning can significantly impact your overall financial situation. It can have implications both now and into the future. Key elements include:
-
- Understanding Your Income & Deductions: Know what types of income you have, how they’re treated, and which tax brackets it falls within. Also familiarize yourself with various tax deductions and credits available to families.
- Asset Location: Utilize tax-advantaged accounts like 401(k)s, IRAs, Roths, and even Health Savings Accounts (HSAs) to reduce taxable income.
- Timing Strategies: Take advantage of strategies to minimize lifetime taxes with such as Roth conversions, mega-backdoor Roth contributions, tax harvesting, and timing the exercising of stock options.
- Insurance Planning
Insurance protects against unforeseen circumstances, making it a critical component of financial security – especially for families with young children. Be sure to consider:
-
- Life Insurance: Ensure that your family is financially secure in case of your passing. You may need more that what’s provided through your employer.
- Health Insurance: Assess coverage options to manage medical costs effectively and optimize employer benefits between spouses.
- Disability Insurance: Often the most overlooked risk for young professionals, protect your income in the event you are unable to work due to illness or injury.
- Estate Planning
-
- Wills and Trusts: Draft a will and consider trusts to manage how your assets are distributed upon death.
- Beneficiary Designations: Regularly review and update beneficiary designations on accounts. This includes retirement accounts, life insurance, as well as bank and investment accounts. In addition to beneficiaries, make sure accounts are titled correctly.
- Power of Attorney: Establish powers of attorney for financial and medical decisions. An estate plan should also identify who will have guardianship of surviving minor children.
- Generosity
Generosity should be a part of any believer’s financial plan. Having a giving strategy helps ensure good stewardship and a heart aligned with God’s will. Approach giving with these considerations:
-
- Giving Strategies: Optimize how you give to give. Give appreciated assets, bunch your giving, and other strategies to maximize the gift as well as the tax savings.
- Giving Tools: Know when to utilize tools such as donor advised funds, charitable trusts, and foundations to facilitate your giving.
- Set a financial finish line: Defining enough for you and your family frees you up to be generous with what God has blessed you with.
The Financial Planning Process
Creating a financial plan is a step-by-step process that typically involves several stages. I’ve built my process to address the needs of busy families who are still building wealth. I’ve also incorporated faith and a values-based approach to my financial life planning process.
- Get organized
I start the planning process by helping clients organize their financial life which helps us assess their current situation.
- Gain Clarity
Next we clarify a client’s values and Purpose for their finances. This is the “why” behind their financial decisions and will help us set and prioritize clear goals.
- Be Intentional
After analyzing their situation and setting goals, we begin to put together a financial plan that is unique to each client. It includes the areas mentioned above and any other relevant pieces of their financial life. It includes specific advice and actionable next steps to move a client closer to their goals.
- Implement
As part of a high-touch service, I help clients implement the financial action items and recommendation from their plan. Busy families seldom have the capacity to tackle it all themselves. As their personal CFO, I assist with not just the day-to-day pieces, but with keeping them focused on the big picture.
- Review & Adjust
Priorities shift, circumstances change, and life happens. It’s important to continually review your plan, track your progress, and make changes to keep you headed in the right direction. I meet with clients 3 times a year in order to proactively plan and address the constantly moving pieces in a client’s life.
Conclusion
Financial planning is a vital aspect of living an intentional life and achieving your dreams and aspirations for your family. By understanding its key components and processes, you can create a comprehensive plan that will set you on the path to success. By being mindful of your values as you set goals and make decisions, you can live a Purposeful life that reflects your faith.
Investing time in financial planning today can lead to a more secure and fulfilling tomorrow, allowing you to focus on what truly matters: investing in relationships, serving your community, and living a life of Purpose.
At Purpose Financial Planning, I’m here to guide you on your financial journey, ensuring you’re making the right decisions for your family and that your choices align with your values. Let’s work together to create a financial plan that will set your family up for more than just financial success… but an abundant life of Purpose.
If you’re ready to take the next step, reach out today to begin your financial planning journey!