4 Steps to Building a Solid Financial Foundation

A good financial plan starts with a snapshot of where you are. We’ll help you look at income coming in every month and expenses going out. Ideally you want a positive cash flow—more money coming in than going out. First, let’s focus on what’s going out. 

How should I allocate my budget?

As you look through your spending, put each expense into one of three categories.

Now that you have a snapshot of where you are, it’s time to prioritize. Hopefully you found a few places where you can save money right away, such as an old subscription you no longer need (but are still paying for). Identify the things that are more important to you. Maybe your travel budget is untouchable. Perhaps it’s important to send your kids to college debt-free. Those are expenses to prioritize. You’ll probably find some other things that don’t mean as much. Those are things that you can say no to in order to say yes to the expenses that matter most. 

Now it’s time to think big and bold … like, lifetime bucket-list bold.  

Retiring by age 60, scaling Mt. Everest, buying a boat, starting your own business, bidding on that Victorian house at the end of the cul-de-sac—whatever you want to do, there’s a pathway to achieving it. Sure, your biggest dreams may come with a big price tag, but that’s why a key pillar in financial planning involves investing your money to grow it over time.  

A financial advisor can help you think through those big goals and what they might cost. Then he or she can recommend the best ways to save and invest for each goal. Because there are so many options, an advisor can help you pick the best ones for you—and show you how they fit into your financial plan.

Here are some common financial tools that an advisor may recommend for saving and investing:

The list above is certainly not exhaustive. As you can see, though, different types of accounts work better for different goals. And they can complement each other. For instance, when you get to retirement, it can be beneficial to have a mix of Roth and traditional accounts. This can allow you to strategically withdraw money in a way that minimizes taxes.

In addition, it’s a good idea to have investments for growth but also safe assets that aren’t impacted by the markets in case you need to access funds at a time when markets have fallen. A financial advisor can get to know you and your goals and show you how to use a mix of different financial tools to reach your goals.

Hitting goals on schedule depends on steady, reliable income—but life, as we all know, is unpredictable. You insure your car or home; you probably have health insurance. But when it comes to your financial plan, have you thought about what would happen if you lost your ability to earn an income? 

This is one of the most critical—and often overlooked—parts of financial planning because without this protection, an illness, injury or the untimely death of a breadwinner in a family can upend your plan. This is a big part of what differentiates a good financial plan. 

It’s a good idea to consider: 

Disability Income Insurance: It’s important to have a plan for what you’d do if an illness or injury ever prevents you from working for an extended period. Disability insurance pays a benefit when you get sick or injured and will replace a portion of lost income when you can’t work. You’ll typically receive disability benefits through your employer, but dig into those details to ensure your benefits align with your goals. Your policy’s benefit may not be enough to cover your long-term income needs (would you insure your home enough to get only 50 percent of its value if it burned down?). If coverage through work isn’t quite enough, you can easily purchase additional coverage. When you have a plan for disability, you don’t have to worry as much about what you’d do if a disability ever prevented you from working.  

Life Insurance: If you have people who depend on you financially, life insurance is an essential part of the plan. This protects your family if you die prematurely, and the benefit that’s paid to your family will help cover their expenses when they can no longer depend on your income. A term life insurance policy is an inexpensive way to maximize coverage within a specified window of time, while a permanent life insurance policy covers you for life and has additional benefits that can become a key part of your financial plan during your life.  

Debt gets a bad rap. While it’s true that some debt—like high-interest credit card debt—is a drag on your finances, not all debt is bad. For instance, a mortgage on your home allows you to buy a tangible asset where you’ll live and build value in it over time. Other debt, like student loans or a business loan, may have allowed you to get an education or take advantage of an opportunity.

The first step in managing debt is simply to organize yourself. Gather a list of all your debt and put it into some general categories.

How a financial plan can give you confidence that you’re on the right track

Hopefully you’ve got a few nuggets that you can put in practice to improve your finances right away. But now’s the time you may want to consider leveraging a financial advisor. An advisor can help you bring all these pieces and more together to build a plan to that gives you confidence that you’re on track to reach your financial goals. The following video explains a little more about how we approach planning. Then below the video see an example of a family’s budget and how a plan shows them they’re on track for their goals.

Now, let’s see how it all comes together in a “real” family’s plan.  

Meet the Douglas family 

Stephen, 36, is a project director at KPS Inc.—he’s pretty sure a job in the C-suite is in the cards within the next few years. Michelle, also 36, is doing just as well, working as a marketing consultant. She’s been pegged for the director role at Kay’s Marketing once her long-time mentor retires within the next few years.  

Stephen and Michelle met in college, and that experience was so important to them that they want to fund a substantial amount of tuition for their children, Vincent, 5, and Gloria, 2. When they’re older, the couple wants to retire without financial worry.  

Here’s how the couple incorporated the financial principles above to set them on a course toward their goals.  

Cash flow and current picture 

Stephen’s salary is $100,000, and Michelle brings home $75,000 annually, which breaks down to $10,759 of household income each month after taxes. They have $45,000 in cash, split between a joint savings account and a CD. They have $98,000 in non-qualified investments—stocks, mutual funds and 529 college savings plans for Vincent and Gloria ($4,000 each). Together, they have $165,000 combined between their 401(k)s and Stephen’s IRA. Stephen still has an outstanding student loan totaling $15,000, and they have a $335,000 mortgage, but other than that they have no debt. Stephen and Michelle both have term life insurance policies worth $700,000 and $500,000 respectively.  

Given the Douglases’ current assets and debts, they have a net worth of $481,000. 

The Douglases’ goals 

When the Douglas’s meet with their Northwestern Mutual financial advisor, they learn that for the most part, they’re on a great track. They have a nice cash cushion; they’re saving for retirement, and they have no high-interest debt to speak of. Really, the focus is on securing the future and ensuring nothing knocks them off track.  

Of course, retirement is a goal. The Douglases have also identified paying for their kids’ college as another important priority. Then they want to make sure they have enough for priorities today and that they’re protected in case something happens to one of them. 

Saving for future goals 

The Douglases’ financial plan shows them that with their current retirement assets and monthly contributions of $1,300, they could have more than $2.8 million in retirement assets by the year when they plan to retire (assuming 5.1 percent growth each year). Meanwhile, by contributing $650 each month, they could have more than $115,000 for each of their children’s college education. 

Safeguarding today and tomorrow 

While the Douglases have a healthy amount of savings, their advisor discusses with them a plan to contribute more to get to about six months’ worth of emergency savings. In addition, their plan suggests they should opt for a mix of term and permanent life insurance to get to about $1.2 million in death benefit for Stephen and about $925,000 for Michelle. In addition to the increased death benefit, this will allow the couple to take advantage of the additional benefits that come with permanent life insurance. 

Here’s what the couple’s current cash flow looks like: 

Fixed Expenses: $6,000 

• Mortgage: $1,800 

• Health insurance: $1,000 

• Child care: $600 

• Property taxes: $600 

• Groceries: $500 

• Utilities: $250 

• Cable/Phone/Internet: $250 

• Student loan payments: $200 

• Car maintenance/Gas: $150 

• Car insurance: $150 

• Parking: $100 

• Gym: $100 

• Home maintenance: $100 

• Homeowner’s insurance: $100  

• Housekeeping: $50 

• Medical/Dental/Prescriptions: $50  

Financial Security and Goal Contributions: $3,027 

• Retirement contributions: $1,298 

• Gloria and Vincent’s college funds: $642  

• Stephen’s life insurance (term and permanent): $292 

• Michelle’s life insurance: $253 

• Stephen’s disability income insurance: $46  

• Michelle’s disability income insurance: $114  

• Emergency fund contribution: $335 

Discretionary Spending: $1,781 

• This is money the couple can spend however they’d like, from going out to dinner to taking a vacation. But given that they have their other goals covered and they’ll be able to see how they're making progress toward them, they won’t have to feel any guilt spending this money each month. 

A financial plan brings it all together 

The example above is a very simplified explanation of how a good financial plan brings your financial picture together—making sure you’re prepared for obstacles along the way. An advisor can work with you to understand where you are today and where you want to go. Then the advisor can help you take the right steps to make sure you’re on the path to reach your goals. 

But the true benefit of a plan is that you can see how one area affects another. For instance, knowing that you’re on the path to save enough for college and retirement should empower you to spend your discretionary funds today—guilt-free. Your advisor can also show you how different parts of your plan reinforce each other. For instance, if the markets have a bad year when you retire, you might be able to lean on life insurance cash value to create income without jeopardizing your investments.²

Remember, the process doesn’t end with the plan or a single meeting with an advisor. Your life is going to change. That promotion to vice president might come 10 years sooner than you thought. Your music hobby turned into a music shop. Your advisor will be with you every step of the way, prepared to tailor your plan to fit each stage in your life.