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You're a Grownup (Don't Panic!):

The Basics of Financial Planning

Welcome to Society of Grownups. My name is Rachel Rabinovich. I'm a certified financial planner on the team here.

At Society of Grownups, we consider ourselves a kind of master's program for adulthood. This is a place for grownups can come and learn all sorts of things, like how to manage their finances, appreciate wine, save for retirement, or negotiate salaries. But most of all, we want you to keep your values in mind along the way.

Today, we're going to talk about building a solid financial foundation, keeping your values in mind, and helping you to determine your goals and make spending decisions.

Since I don't know your personal situation, this class is purely educational. We don't offer any tax, investment, or legal advice. And it may not apply to your personal circumstances. If you have your own issues that you would like to address, I encourage you to make an appointment with a financial planner. I may also refer to some websites and resources. Now, we pick those that we like the best, but we cannot be guaranteed of their accuracy.

You will also see an attachment with this video. If you can print it out, that would be great. If not, try to follow along and use a notepad to do the exercises.

When it's time for us to do exercises, the video will pause automatically. And then you can restart it when you're ready.

In all of my planning sessions with grownups, they want to start with the numbers-- how much they earn, how much they have in debt, what they want to save for retirement.

But I'd really like to take a step back. I want to know who they are, what's on their minds, what's their current situation, and how does it feel? I want to talk about what their big financial goals are and what they would like to accomplish in our meeting. I really want the person I'm working with to drive the meeting but not in the way that they think.

So with that in mind, let's take a moment and look at what your top financial goals are and answer some broad questions about your spending habits.

So why do we start with goals? Well, we really want to know where you want to be. And to do that, we need to have a destination and a direction and a plan of action to get you there. So what are your top three financial goals right now? For me, it's renovating my kitchen, taking large overseas trips with my family, and saving for retirement. The video will pause here so you can take a couple of moments.

So in order to create a sense of awareness about where you're spending your money, let's look at the next three questions. So I'm going to run through them with you. And then the video will pause so that you'll have time to answer them.

So what was the last big financial decision that you made? For me, it was actually taking this job at Society of Grownups because it impacted so many areas of my life. And it actually aligned with all of my goals. It's going to allow me to achieve the things that I want to achieve.

What was the last big purchase you made that you feel good about? For me, it was a trip to Israel last summer with my family. We planned and saved for a long time. And it was the trip of a lifetime with us. And it certainly is in line with my priorities.

And finally, what was the last purchase you made that you regret? So for me, it was a smaller purchase, maybe not. I bought a very expensive pair of shoes for a celebration. They were really beautiful. But by the end of the evening, I couldn't wear them any more because they were killing my feet. And I will probably never wear them again. They certainly were not in line with my priorities. And they brought me no pleasure.

So we're going to pause the video here, give you a couple of moments to answer the questions for yourself.

So now that we know what some of your goals are and where you're starting from, let's dig in. So there are two pieces to everybody's financial plan-- a financial foundation and your personal value system. So there are some core tenets when we're talking about our financial plans-- things like pay your bills on time and live within your means. These are things that nobody can really argue with, right? And these are the things that we have to consider before we can really think about saving for other things, like that boat you want or the big vacation that you want to take. So we're going to run through this checklist together, which you will see on your attachment. And we're going to do some of the exercises on it.

Now, the questions may look really simple. But it doesn't mean that they are easy to put into practice. After each question, we'll pause the video for a moment.

On a monthly basis, do you know how much you make after taxes and how much you spend and how much you save?

It's really a misconception that for any spending plan that's going to work, that you have to cut a significant portion of your budget in order to be able to save for your goals. The reality is if you cut your budget in a restrictive way, it's probably not going to work. So think about the 50, 20, 30 rule. And what this essentially means is that 50% of your income should go to paying for your needs, THE things that you need to keep your life going. 20% of your income should go to paying for your goals, like your savings goals or for extra debt reduction. And then 30% can actually go to where you want it to go. So this is really just a guideline. It probably won't work perfectly for your situation. But it's good to keep it in mind. So we're going to pause now and give you some time to write down these numbers.

So how do these numbers make you feel? If you aren't satisfied with what you see, I would suggest you take a month or two and track your spending in whichever way works best for you.

Do you have enough savings to cover your expenses in case of an emergency?
There's a general rule of thumb that you should have three to six months of expenses set aside for an emergency. Now the reality of that is, it really applies to your personal situation. If you live on one income or you have a variable income, maybe you want to think about keeping six months of expenses set aside. If you are in a dual-income family and your income's stable, maybe you're more comfortable keeping three months worth of expenses set aside. Again, whatever is comfortable for your situation.
Do you have credit card debt, student loan debt, or other types of debts?
Now, it's another misconception that you need to pay of all your debts before you can start saving for your goals. What you want to do is make it part of your spending plan so that you can work towards all of your goals at the same time. If writing down your debts is a little bit too much right now, I encourage you later on to go back and list them all out. Include your balances, your payment amounts, and your interest rates. It's really a way of starting to organize yourself so that you can start to move forward with getting rid of all that extra debt. Society of Grownups has a great loan repayment calculator that can really help you to strategize how to pay off your debt.
Do you know what your credit score is?
Your credit score is like your GPA for all of your credit transactions. As we go through in more detail in our class, Can I Have Your Number? the credit score is made up of five components-- your payment history, your use of available credit, the age of your credit accounts, the number of new inquiries, and the total number of accounts you have. This is really a tool to help you be able to get the best rates you can when you go to take out loans. Now, you don't need to have a high credit score to be able to take out a loan. But it will certainly affect your interest rate.
Do you know how much you're saving for retirement?
It's a common misperception that saving 5% to 10% of your income is enough. It really depends on a number of factors, like your age and whether or not you have a pension plan. But typically, it's a safer bet to try to save between 15% and 20% of your income. If you have an employer-sponsored retirement plan, I encourage you to contribute to it. If you don't have one, think about opening an IRA or a Roth IRA. Now they both have contribution limits. And that can vary each year according to the law. So I would suggest you go to irs.gov to find out what this year's current contribution and income limits are. So now comes the more personal part of the plan.
So why do we look at your values?
Because for any financial plan to work, we have to take the things that are important to you in mind. This can also help determine your goals and help you make sound spending decisions. It can also be helpful when you're trying to figure out where to spend things like your discretionary income. So how do we determine our values? On pages 4 and 5 of the attachment, you'll see 50 values written out. And we're going to go through them and start to pick them out for ourselves. Now, some of them may look similar to you. Don't get caught up on that one. And the definitions might not quite match what you think that value means. So pick out what makes most sense to you. What we're going to do is pause the video now. And I'd like you to pick out as many as you like.

All right, now that you've done that, there's more work to do. I'd like you to take the values that you picked out and pick your top 10. We'll pause again.

All right, don't hate me. But we are not done yet. Now I want you to pick out your top five. I think this is probably the hardest piece of the exercise. It was for me. So once you pick them out, go back and jot them down on the spaces available on page 2 of the attachment. We'll pause again.

So when I did the exercise for myself, I came up with adventure, family, happiness, health, and meaningful work.

So let's talk about how these values relate back to your plan.

  • Do the three goals that you listed at the top of the class align with the values that we just picked out?
  • How do your values come into play with the spending decisions that you made?
  • Do they align with the spending decision that you were happy about?
  • What about the one that you regretted?

Let's talk about how we can put these values into action with our financial plans. So if you picked wealth or income as one of your values, there are a number of things you can do to make this a reality. Maybe it's time to ask for a salary increase. And if that doesn't work, maybe you need to get real about finding a new job. Maybe you'd like to buy some rental income property or start freelancing. The options are numerous.

What if, like me, you chose adventure? Well, maybe it's time to get serious about your spending plan. Are there places that you can cut so that you can start to fund a savings account to plan for that next big trip?

What if education is one of your values? Would you like to be able to send your children to college with little or no debt? Maybe it's time to start thinking about funding a 529 plan. So building a solid financial foundation allows you to pay more attention to your values, start working toward your goals, and helps you define your spending decisions. It's all up to you.

Now remember that over time, your values can change. Mine have. Now it's time to look towards my other goals and honor the other values in my life.

So I hope these exercises have helped you to think through your values and how they can affect your spending decisions and your goals. Please check out the attachment where we have additional tools and resources that can be really helpful to you. And check out the Grownup Blog on our website. I really want to thank you all today for attending this class.

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Any third party resources or websites referenced are not under our control. We cannot guarantee and are not responsible for the accuracy of the resources, websites, or any products or services available through such resources or websites. While we hope the information in these materials are useful, it’s only intended to provide general education. It’s not legal, tax, or investment advice, and may not apply or be useful to your specific financial situation. If you need recommendations geared to your personal financial situation, schedule time with a financial planner.