Couple working out finances - Earnings and Personal Planning

This article begins with some uncommon guidance from an news editor friend of mine.  I say uncommon as the focus was to be about personal financial planning from an earnings perspective.  Here’s the guidance questions I was provided:

  • Why is it important for you to create a long term personal earnings estimate?
  • What are the steps to create this personal earnings estimate?
  • What future potential realities should be easier to navigate with a solid personal earnings estimate?

To the average person, these questions appear quite reasonable and important to know.  Yet, I rarely have looked at personal financial planning in this way.  When I hear the word “earnings” as related to a household, I immediately think of the income that that household generates.  And, for anyone who has explored the personal financial planning process, it is about helping people to live within their means, accumulate and protect savings, and map out an efficient path towards achieving life’s goals.  And, planning professionals tend to focus on areas that are more easily within one’s control rather than trying to forecast what may be less predictable.

On the other hand, when I think of the word “earnings” as related to companies, I have no problem with the concepts of net income or net cash flows generated.  But, I’ve begun with a modest mental block and have almost begun to digress as well.

Helping you Understand Personal Financial Planning

At Henry V. Kaelber, CPA, CFP®, CGMA, we are committed to providing our clients and readers with every advantage when trying to preserve and grow their human, intellectual and financial wealth.  This article discusses an overview of personal financial planning from an earnings perspective.

Henry V. Kaelber, CPA, CFP®, CGMA is a Charlottesville, Virginia CPA firm providing quality tax accounting, tax preparation & tax planning services for individuals, business, trusts & estates. We also offer business consulting services and private equity structuring support.

Overview of the Financial Planning Process

First, I think it is important to understand that financial planning is an ongoing process.  It begins with determining what you have, how much you need to maintain your lifestyle and what goals you want to set for your family and self.  These goals describe what it is that you want for your household in the future.  Once you determine where you’re at, what you need, and what you want, the last step is to figure out how to get there.

The process of determining what you have and how much you spend on your lifestyle is often referred to as “constructing your financial profile”.  However, a financial profile is more than just how much you earn and what your net worth is.  It should also incorporate your lifestyle, risk tolerance, responsibilities, and all financial resources.

Your Dreams for the Future

Your hopes and dreams for the future describe your goals and objectives.  And, you make it easier when you are more specific, or tactical, when setting your goals.  While most people are initially strategic about setting goals, it always helps if you can be tactical about them.  For example, a strategic goal is “I want a comfortable retirement”; while a tactical goal might sound more like, “I want to retire when I’m 62 years old”.

Creating Your Road Map

Once you’ve documented where you are and where you want to go, you’re ready to begin to plan.  This is the process of creating a “road map” detailing how to get from where you are to where you want to go.  In it, you should really seek to describe the following:  How much of an emergency fund is needed?  Do I have adequately insurance?  Are my investments properly positioned to meet my goals?  How should I be managing debt?  How will I achieve retirement.  And, how do I wish for my family to be cared for if I die before they can take care of themselves.

Once you’ve developed your plan, it is important to understand that it is also an evolving document.  As a person ages, needs and desires may change.  Or in other words, some of the goals may have changed.  Therefore, you will periodically alter your plan as things change.  However, a well thought out plan will have the ability to be modified and remain solid.  It will also meaningful throughout your lifetime.

The Most Important Factor

Whether you engage the services of a financial planner or endeavor to do it yourself, the most important factor to understand is that the plan has to fit your lifestyle or help you understand what lifestyle changes you need to make in order to reach your goals.

And, how to you best begin to understand your lifestyle?  You do this by understanding how you spend.  Your household budget defines your lifestyle.

In personal financial planning it is not always about what you earnings are, it’s about what you keep.  In fact, most financial planning calculations are based upon a household’s spending habits.  Or in the case of households that spend beyond their means, what your household spending habits should be.

If you really want to increase your wealth with certainty, you really need to focus on your household budget before anything else.  And, if you’d like to learn more about personal budgeting basics, I invite you to read an article I wrote on this topic.  You can read it from my web site via this link:  Increase Your Wealth With Certainty!

About the Author

Henry V. Kaelber, CPA, CFP®, CGMA