Part 1 Personal Financial Plan Foundation

This is the first in a series of three articles on Personal Financial Planning. It starts with Part 1 Personal Financial Plan Foundation with Part 2 and 3 to follow. The idea behind a Personal Financial Plan is financial health and accomplishing goals to live free of money worries. At A Sense of Wealth, it is also about how to live the life you want free of money worries.

Keep the end in mind. The foundation for Your Personal Financial Plan (PFP) is your long-term dream of financial independence and True Wealth discussed in “Welcome to the Journey.” It is really a plan of change; getting from where you are to where you want to go.

First, you need to recognize how you think about, feel about, and use the money. If you don’t consider your relationship to money, your Personal Financial Plan may fail as you fall back into unknown habits that may hurt you.

Let’s approach this through the lens of Covey’s circle of influence, those things we have influence over. There are three significant factors you have control over:

1. Your Financials
2. Money Scripts
3. Financial Lifestyle

Considering all three factors in your circle of influence makes the plan: Your Personal Financial Plan.

Let’s go over the basics of a PFP, and then dive into the factors you need to recognize about yourself.

What is a Financial Plan?

A financial plan makes your longer-term financial goals real by stating them. It then maps out the steps needed to achieve those goals so you become accountable. It considers your income, expenses, savings, debt, investments, and time frame.

Isn’t that Just a Budget?

Financial plans are different than budgets. Think of a financial plan as a road map for change to your longer term goals. It includes things like buying a house, retirement, or financial independence.

The budget is more about getting through the week or month balancing income and expenses. Think of budgets more like the maintenance to manage things where we are now.

Both are helpful for financial success and they help each other. But plans and budgets are not the same.

Your PFP defines how much money you will need to accomplish your longer-term goals. It quantifies where that money will come from after your monthly (budget) expenses are paid.

The financial plan is where you are going, and the budget is where you are today.

Why is a Personal Financial Plan Important?

Your PFP assures you start off on a solid foundation and is a critical process in the quest for financial independence. It is not complicated but essential.  You can complete a plan quickly and on one sheet of paper if you like.

A neat feature of your PFP is it shows you how you’ll get to your dream of True Wealth. It changes your dream from a notion to a goal with a road map you can follow and measure progress.

Measuring your goals as they progress and get accomplished is a strong motivator over time.

Understanding Your Financials

We can readily externalize sources of financial stress to the economy like a recession or down stock or housing market.

It’s much more difficult to recognize or admit the areas within our circle of influence that add to the stress. We overlook things like lack of emergency funds, high debt, overspending, etc. That’s because everyone seems to have the same problem, right?

Your personal financial plan foundation requires you to take responsibility for those things within your influence. These include your financials, your net worth, and creating a solid foundation for a plan to reach your goals and minimize the impact of external stress.

We hear or may have said ourselves, it’s hard to follow a financial plan or budget. That’s probably because most plans reflect a need for change. It may not help much if plan to do what we are already doing or make slight modifications to it.

If it doesn’t help us get where we want to go, there is little incentive to follow it.

Money success and failure is often the result of paradigms that lie beneath our conscious awareness and traced to past conditions, environment, or a lack of financial literacy.

As Stephen Covey explains, highly effective people “Begin with the end in mind.” He asserts that many of us live scripts handed to us by others. We reactively adopt scripts given to us by family, others, and circumstances from earlier years, never questioning them.

Understanding Money Scripts

In The Journal of Financial Planning, Brad Klontz and Sonya Britt explain how these scripts affect the way you think and feel about money:

• Money scripts—typically unconscious, trans-generational beliefs about money—are developed in childhood and drive adult financial behaviors.
• Three categories of money script have a negative impact on financial health: money avoidance, money status, and money worship. These belief patterns are associated with lower levels of net worth, lower income, and higher amounts of revolving credit.
• Money script patterns can predict disordered money behaviors, such as financial infidelity, compulsive buying, pathological gambling, compulsive hoarding, financial dependence, and financial enabling.
• Money vigilance beliefs, including themes of frugality, discreetness, and anxiety about money, appear to be protective factors against poor financial health and destructive financial behaviors. While they encourage saving and frugality, excessive wariness or anxiety could keep someone from enjoying the benefits and sense of security that money can provide.
• An individual’s profession can predict money script patterns and vulnerability to disordered money behaviors. Specifically, when compared to financial advisers, mental health professionals are more likely to be money avoidant. Business professionals are more likely to be anxious and secretive around money. Business professionals, mental health professionals, and educators are more likely to avoid thinking about money, try to forget about their financial situation, and avoid looking at their bank statements.
• Once identified, money scripts are challenged and changed to interrupt destructive financial patterns and promote financial health…

Your Money Scripts

Take a moment to reflect on how you think about money, and where those beliefs come from. Is it a status symbol to you? A safety net? Something you try not to think about?

You can then decide to keep, discard, or modify them in your personal financial plan foundation.

How did your family treat money when you were growing up?

Is this consistent with what you really value in life? When you start to recognize the pattern, you can break free of it.

Now, as you create your Personal Finance Plan, is the time to challenge patterns of thought to help your success.

Understanding Your Financial Lifestyle

So, the final piece of your personal financial plan foundation is understanding how you use your money. This is what author Brent Kessel calls your “core financial story.”

In his book, It’s Not About the Money: A Financial Game Plan for Staying Safe, Sane, and Calm in Any Economy, Kessel points out that your past causes you to respond to money in “particular and sometimes peculiar ways.”

Knowing your financial lifestyle makes you aware of potential financial motivations and pitfalls. You can then make the necessary adjustments to align your financial lifestyle with your goals.

Kessel Seven Examples of Financial Lifestyles

Which of Kessel’s financial lifestyles summarized by Elior Moskowitz do you identify with?

1. The Guardian: “Something is going to go wrong.” Motivation: Preparing for the worst-case scenario. Pitfalls: Feeling too anxious to act on financial decisions effectively.
2. The Pleasure Seeker: “Money is meant to be enjoyed.” Motivation: Enjoying the good things in life. Pitfalls: A tendency to spend impulsively, which makes it hard to stick to a budget.
3. The Saver: “Saving provides security.” Motivation: The more money Savers have put away, the safer they feel. Pitfalls: Feeling a panicked loss of security when they have to spend.
4. The Star: “Money is required for respect.” Motivation: Cultivating feelings of pride, recognition, and increased self-esteem. Pitfalls: Constantly moving the goal post and struggling with feelings of inadequacy.
5. The Innocent: “Money is confusing. I can’t deal with it.” Motivation: Feeling overwhelmed by financial matters. Pitfalls: Innocents are often in the dark about their financial situation.
6. The Caretaker: “Money is best spent by helping others.” Motivation: Wanting to assist family, friends, and their community—and to feel needed. Pitfalls: Can perpetuate a cycle of dependency and resentment.
7. The Empire Builder: “Money gives me the power to create something of lasting value.” Motivation: Using financial success to make a lasting impact on the world. Pitfalls: Always wanting to achieve more.

Starting from a Place of Understanding

We are all affected to some extent by these paradigms. And, when identified, challenged and changed if needed.

This awareness gives you a good foundation on which to create your Personal Financial Plan. One that is truly personal and aligned with your vision of True Wealth. One that will motivate you to follow it because it fully considers you and helps you pursue your dream.

The next article, “Part 2 Create a Personal Financial Plan” shows how to do it.