What are the First Steps in Financial Planning?

March 30, 20226 min read
What are the First Steps in Financial Planning?
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Key takeaways

  • A solid financial plan can help reduce money-related stress and achieve financial freedom.
  • We identified seven key actions you can take to help streamline your financial planning.
  • Alternative investments can help diversify your portfolio and increase your passive income.

The likelihood of success increases when you plan ahead. This is particularly true when it comes to your personal finances. Let’s look at a few easy steps in financial planning that can get you off to a strong start.

What is financial planning?

Financial planning is a multi-step process that includes assessing your current financial situation, outlining your goals, and developing a strategy to reach them. The aim is to construct an investment portfolio that allows you to achieve them by targeting specific returns, the amount of money you will eventually need, a specific duration of, the timeframe for your investments as well as your spending plans. 

At Yieldstreet, we believe there are seven key steps in financial planning. 

Determining your current status 

The first step is getting an accurate assessment of your income, assets and liabilities. You’ll also need to figure out how much liquidity you have, assets that can be easily monetized in an emergency. In addition, you’ll need to assess your monthly expenses including, your mortgage, lease or rent payments, insurance coverage, as well as utilities and, potentially, car-related expenses.

The information you gather is crucial to determine how much money you have coming in, how much you can devote to achieving your financial goals and, eventually, how to allocate your funds toward that end goal. 

Outlining your financial goals

What do you want your life to look like in five years, a decade from now and when you ultimately retire? 

Making these determinations can help develop a plan that works for you. Your goals can be, for instance, to buy your first home for your family, see your children through college without them taking on debt, and retire debt-free. Identifying your goals will help you prioritize them and craft a plan around seeing them come to life.  

When discussing financial goals, it is important to separate them into categories based upon their timeframe, as this will help identify your immediate cash needs as opposed to longer-term requirements. For instance, a short-term goal can be a cash purchase of a car, a mid-term goal a home purchase, while a long-term goal is usually tied to retirement plans.

What are the goals that matter to you? What do you anticipate your needs will be in the near term, mid-term or long term? These questions and the time horizons they focus on will be relevant when you’re looking at savings and investment options. 

Allocating your funds

Consider creating a spending plan, because where you allocate your expenditures is key to developing an effective financial plan. This wording is preferable to “drafting a budget” as it sounds less cumbersome, and more reminiscent of joyful moments after all, spending is fun, otherwise, what other reason would there be to save? 

Developing a spending plan will help you allocate your available dollars to what gives you the most joy. It may also help you identify additional needs, and it can uncover misallocations of funds, ultimately making you rethink the way you are currently using your money. But such a plan can also identify substantial unused disposable income that can be re-assigned to your spending priorities. 

The ultimate aim is to live comfortably within your means. 

Establishing an emergency fund

Maintaining a certain amount of resources in liquid assets – cash, public market securities – is key to any good financial plan. When in need, these assets can be easily sold to pay for short-term liabilities and can often avoid having to take on debt instead.  

Most experts recommend keeping three to six months worth of current expenses in highly liquid assets. These assets can cushion a potential job loss, severe illness, or other unexpected short-term expenses with limited negative impact – if any – on your financial plan. 

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Eliminating bad debt

“Good” debt can be seen as a financial obligation you take on that is expected to ultimately help improve your income, while bad debt may be – for instance – a consumer loan or credit card debt you take on to satisfy an immediate need even as you lack the means to repay it. 

Examples of good debt can be a home mortgage – if it is within your means – or a car loan if it helps reduce your commute time and makes you more productive at work. Education is also a goal worth getting into debt for, with the caveat that some degrees are unlikely to be worth the financial investment. 

Debt and leverage are not bad per se, though it is preferable to keep leverage levels low, as compound interest can start working against you. However, successful businesses sometimes rely on high levels of leverage – at the end of the day, it all depends on whether the debt has a purpose and is sustainable. 

Saving and growing your assets

Does it make sense to save (beyond creating an emergency fund) and invest while you’re in debt, or should you get rid of debt first, then start saving and investing? The consensus is it makes sense to eliminate high interest debt first, because the rate you’ll pay can be higher than what you’ll achieve from saving and investing. For instance, credit card debt should be paid off first as its rates are extremely high. 

However, if your debt load is such that all you have is good debt — at interest rates lower than you could realize from an investment strategy — then it could make sense to do both simultaneously, as investment income can at times offset debt interest payments. 

Whatever the choice, finding ways to generate passive income is key to a successful financial plan. Passive income is money made from investments in various forms –  mainly trading securities such as stocks and bonds, or purchasing rental property. One easy way to grow your money is to take advantage of your employee 401(k) savings plan, especially if your employer offers matching funds. 

The overarching goal is to have put your money to work so that you won’t have to — eventually.   

This once again highlights the importance of determining your short, medium and long-term goals, as you’ll find it easier to adopt specific investment strategies for each category. 

Diversifying your investments

When it comes to investing, it is worth keeping in mind two fundamental concepts: diversification and risk tolerance. Spreading your investment dollars around different asset classes, rather than concentrating them in one area, can help mitigate market volatility. You can split your investments between those that are more likely to be stable (but low yielding) and riskier ones (but potentially high yielding), but you should always take into account the overall risk profile of your entire portfolio. 

The need to diversify can lead to investing in assets beyond public securities. Yieldstreet can help you achieve diversification through multiple investment offers, across different asset classes within private markets, including Real Estate, Legal Finance, Marine Finance, Art Finance, and Commercial and Consumer Finance. 

Even better, you can tailor the nature of your Yieldstreet investments to your specific situation, whether you’re looking to generate income, grow your overall portfolio value, or some combination of both.

Learn more about the ways Yieldstreet can help diversify and grow your portfolio.