Picture of Christopher A. Hopkins, CFA

Christopher A. Hopkins, CFA

Financial planning 101

“By failing to plan, you are planning to fail.” This pithy aphorism from Ben Franklin has been borrowed by the likes of Winston Churchill and regurgitated by thousands of financial planners in the years since. Yet there is wisdom in the notion that success in financial affairs as in life is intimately connected with planning and preparation.

The process of developing a comprehensive financial plan can seem a bit intimidating, and there are many competent experts available to provide guidance and assist in the preparation and implementation of a long-term plan. But even if you are not ready or willing to engage a professional, there are steps you can take to help assure that you are heading in the right direction until your situation demands a more comprehensive analysis.

It is useful to decompose the process into a few broad elements that professionals apply to financial planning. Whether you choose to do it yourself or hire an expert, you will need to focus on these topics and perhaps make some difficult choices to take control of your financial direction.

Set goals. The first step in a journey is to identify the destination, including any planned stops along the way. Identify your main objectives like retirement, college funding, charitable objectives, and quality of life. Try to quantify as best you can, and at this stage don’t worry too much about feasibility as you will come back and adjust later.

Identify your current position. Next, create a personal financial statement listing all your assets (the things you own), alongside your liabilities (what you owe). The difference between assets and debts is your current net worth. If you’re just getting started, it may be negative until you build more wealth and retire obligations.

Also, start working on a budget. Initially, this involves carefully documenting everything you spend for a couple of months and writing down fixed expenditures to compare against income. This process should help understand how much discretionary income you have left for saving and investing and where you should consider prioritizing or eliminating if necessary to reach your goals.

Evaluate debt. Too much debt is often the biggest obstacle to attaining financial security, and paying down high-interest loans should be a top priority. Focus especially on the costliest obligations like any credit card balances or consumer loans, and keep banging away at student debt. Don’t assume those student loans will be forgiven; they probably won’t. Even lacking a comprehensive financial plan, the best move you can make is to get out of debt.

Invest in your retirement. If your employer sponsors a retirement plan, take the time to understand it and maximize the benefits to the greatest possible degree. Defined contribution plans like 401(k) and 403(b) plans put the onus on the employee to save, but often incorporate a partial employer match of contributions. Try to contribute at least enough to maximize the free money from your employer.

If available, consider the Roth option that allows you to make after-tax contributions but withdraw the earnings tax free at retirement. Unless you are very close to retirement, the Roth option is likely to increase your net worth after taxes and does not impose mandatory withdrawals.

There are other options available if your employer has no plan, including Roth IRAs with the same tax benefits.

Risk management. This includes protecting your assets from unforeseen hazards and includes life, property and liability insurance and possibly long-term care coverage.

It also means building up an emergency fund to cover unexpected expenses like car repairs, medical bills, or a stretch of unemployment. A good rule of thumb is 3 to 6 months’ worth of living expenses.

Tax planning. Rather than a once-a-year mad rush to TurboTax, tax planning should be incorporated into your financial plan and inform investment decisions throughout the year. It also involves loss harvesting during end-of-year portfolio rebalancing and should guide your decisions on whether to hold certain assets in taxable accounts versus retirement accounts.

Estate planning. Complex family situations may require a complicated strategy, but even young individuals and families should have a current estate plan. At a minimum, that should include up to date wills but should also incorporate powers of attorney for health care and financial decisions should you become incapacitated. Don’t neglect this aspect until it is too late.

Fortunately, there is a host of online resources to help you get started. is a useful site for financial information and incorporates many tools for budgeting, retirement estimation, evaluating home and car loans, and advice on debt management.

Government sites like,, and offer financial education and calculators as well as advice on protecting yourself from fraud.

Most financial services firms like banks and brokerages offer a suite of planning tools and education as well. And the American institute of CPAs runs a very informative website called 360 Degrees of Financial Literacy ( with dozens of calculators and planning tools to help you get started.

Most families would benefit from the advice of a qualified professional at some point. But having no plan at all is a recipe for failure, and there are many steps you can take on your own to start off along the right highway. As the great philosopher Yogi Berra once said, “If you don’t know where you’re going, you’ll end up someplace else.”

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