A Four-Step Financial Plan

I have decided to present a simple list of four steps that constitute a basic financial plan. As I think about how I have made progress toward becoming wealthy, I realise that most of my choices are specific to my situation. I can’t tell you to buy stock in XYZ Inc, because it won’t necessarily present you with the same opportunity it presented me. I can’t tell you to set aside a certain amount of money each month, or buy investments before paying down debt, because your situation is likely very different from mine.

But because I give financial advice, I want to generalise to find the steps that everyone can take that will move them toward success. It must be a simple list that will not be overly specific, but which will give you areas to work in. Each of the following four areas will be expanded later.

In Lewis Caroll’s Alice’s Adventures in Wonderland, Alice comes to a crossroad and asks the Cheshire Cat which way she should go.

“Which road should I take?” she asked the cat.

“Where do you want to get to?” the cat asked helpfully.

“I don’t know,” admitted Alice.

“Then,” advised the cat, “any road will take you there.”

1. Where are you presently?

Your present financial situation entails knowing how much debt you have, what your assets are worth and what your income and expenses are each month. This gives you a snapshot of which direction you’re facing and how fast you’re moving.

2. Where are you going?

The finish line is very individual. It’s not even a race, but simply where you want to end up. For some people, they want to spend six months of the year on the beach starting at age 65. Others simply want to be able to stop work at age 55, to spend more time with their family and serving in their community. If you have a clear vision of your future, it will motivate you to take action now.

3. How do you get there?

Most people start with this step, because there are so many possibilities. I’ve talked with people who don’t want to plan for their future, they just want to know which stock to buy. It makes me think of the Cheshire Cat because, without a purpose, any one will do.

Your plan to get from your current situation to your goals can be as simple or complex as you like. At it’s simplest, there are two steps: save and invest. As you make progress and either develop skills or get advice, you may address aspects such as safety, taxation, charitable giving and inheritance.

4. Put it into action.

There is no difference between having no plan and having a plan that you do nothing with. However, there are probably a couple simple steps you can take that will have a large impact. For example, opening accounts and setting up automatic monthly payments. The more the actions are automatic, the more likely you will continue to make progress.

A good plan should be written and reviewed from time to time. You will make note of the information that goes with each of the steps above. Reviewing your goals regularly will keep you motivated, and seeing your progress will feel rewarding. Making a few good decisions soon will greatly increase the probability that you will reach your goals.