Do you have five minutes?
If so, here’s an exercise for you. All you need is a blank piece of paper and a Sharpie.
- At the top of the page, write down your net worth – how much money you have now minus any debt you owe. (Just guess!P
- At the bottom of the page, write down what you would do with your life if money were no object.
- Next to it, jot down how much money it would take to do this. $600k? $1 million? $5 million? Just throw out a wild guess.
- Finally, draw a line between where you are now and where you want to be.
This, my friends, is the beginning of your “One-page Financial Plan”.
That is the title of the new book by one of my favorite personal finance writers, Carl Richards, aka “The Sketch Guy”. If you don’t know him by name, you would probably recognize his famous black-and-white doodles that have appeared weekly in The New York Times since 2010.
The One-page Financial Plan: A Simple Way To Be Smart About Your Money teaches one of the most vital habits for building wealth: How to make financial decisions today while weighing their likely impact on your future.
Do 20-somethings need a financial plan?
In a conversation with Carl last week, I said I thought the term “financial plan” might be intimidating, or out of place, to 20-somethings. After all, in your twenties, you don’t know where you’re going to be working or living next year, who you’re going to be dating, let alone how much money you need to retire.
Carl didn’t miss a beat. “It’s not necessarily about a financial plan”, he said. “It’s about planning for your financial future.”
For a married 40-something couple, planning for the financial future may, in fact, mean thinking about retirement. But for a 21-year old, it might mean weighing the costs and benefits of getting a graduate degree.
- Will you know exactly how much money you’ll need to borrow? Probably not.
- Can you be sure that getting a graduate degree will help you get a job or increase your salary? No, you can’t.
But you can take an educated guess. Stuff happens. Things change. But planning your finances based on a guess is better than not planning them at all.
Just do something
With The One-page Financial Plan, Carl hopes to help people let go of the anxiety that surrounds money decisions. For example, he pushes the concept of “no shame, no blame” anytime you have financial discussions with your partner, advisor, or even yourself.
Carl writes about friends – smart people at the top of their careers – who fail to prepare for retirement. The problem, he writes, is that “They’re often paralyzed by the fear of making the wrong decision.”
As a result, much of Carl’s advice boils down to something I’ve hinted at for years: Just do something. Anything. Just take action.
If you can’t decide whether to pay down debt or invest, just pay down the debt, Carl says, adding: “…every client I know who’s gotten debt-free or stayed debt-free has felt good about it.”
If you can’t decide where to invest, just stick all of your money into the Vanguard S&P 500 Index Fund and leave it there. You’ll wake up 20 years from now, look at the balance and go “Wow, that was a good decision.”
If you’re afraid of the risk of investing, don’t sweat it. Just save, putting your money into savings accounts and CDs. Even with inflationary risk, you’ll do far better than the millions of Americans who save nothing at all.
If you don’t know how much to save, Carl has another delightfully simple response: “Save as much as you reasonably can.”
Move toward your destination, one “best guess” at a time
Which brings us back to your one-page plan. If you did the exercise at the beginning of this post, you’re looking at the money you have today and the an approximation of the money you need to do whatever it is you want to do with your life.
Everything else is in between.
At some point, you’ll need to be more precise about how to maximize your chances of saving enough to achieve your personal goal. For now, you can use that line on your plan to influence your financial decisions in broad strokes.
For one, you should be able to tell if your ambitions are realistic. If you want to own a yacht and be sailing the world by age 50 but you’re not saving nor working in a six-figure career, something needs to change: Either your goal or your savings. But no worries: No shame, no blame. You just need to adjust your plan.
I am adding The One-page Financial Plan to a very short list of money books I am happy to recommend to anyone. If you’re facing big financial decisions like whether to buy a home, go back to school, or pay off your student loans early, Richard’s simple, friendly method of planning for your financial future will absolutely help.
The takeaway: Plant a tree
Whether you buy the book or not, I will pass on some free advice from Carl. I asked him: If you had to offer young professionals a single piece of financial advice, what would it be?
“The next time you’re sitting under a large oak tree, enjoying the shade, just remember…a long time ago, someone thought to plant that tree.”
You don’t have to choose a life of poverty today so you can save every penny so you can retire at 35 (unless that’s your goal). You can still buy your lattes. But you should plant some seeds so there will be trees when you get older. You just need to do something.