Develop a Personal Financial Plan for the
Future
If
you’re a typical American, you spend plenty of time earning money, but
virtually none managing it.
Few
people even have a game plan to help them achieve financial goals and prepare a
secure future. If you’re in this group, it’s time to develop a personal
financial plan. Do so now, and you’ll be able to face the future with renewed
financial vigor and confidence.
The
following explains how you can begin to develop a financial plan for you and
your family.
Set Financial
Goals
The
most fundamental part of any financial plan is articulating what you want to do
with your money in the form of short- and long-term goals. Typical goals
include:
·
Saving for retirement
·
Managing debt
·
Saving for a child’s education
·
Providing for your family’s
future, through insurance and estate planning
Other
goals might include saving money for a new home or new furniture, accumulating
the funds you need for a second honeymoon, or planning how to care for elderly
parents.
Whatever
your goals, you need to prioritize them. Discuss them with your spouse or other
family members to ensure that you are all committed to meeting the same
financial goals and to help you stay on track.
Construct a
Financial Profile
Before
you can adopt a game plan for meeting your goals, you need to understand your
current position. You can accomplish this by developing a financial profile of
yourself. Essentially, the profile will reveal how well positioned you are —
or are not
Your
profile is a composite of your stage of life, lifestyle, spending and saving
habits, and financial responsibilities and resources.
A
key indicator of your resources is your net worth, which is the total value of
everything you own reduced by any outstanding liabilities. In calculating what
you own, you can divide your assets roughly into three categories: cash and cash
equivalents, like checking and savings accounts; investment assets, like stocks
and bonds; and use assets, such as your home, car, jewelry, and collectibles.
When computing your liabilities, consider all long-term debt, such as home
mortgages, car and student loans, and any recurring credit card debt. Tally
these, and then subtract your total liabilities from your assets. This
calculation will yield your net worth.
Develop an Asset
Allocation Strategy
Now
that you know what you are worth, you have a benchmark to measure your financial
progress. Your net worth will show you how you have allocated your assets —
something you may not have given much thought to in the past. Now it’s time to
consider how you may want to reallocate your assets so you can achieve your
financial goals.
Plain
and simply, asset allocation refers to the way you divide your investment
dollars among different types of vehicles — cash, bonds, stock, real estate,
etc. The choices you make will depend on how much risk you are willing to take
and the return you expect on your investment. Although higher risk vehicles
generally result in greater returns on your investment, it is not always the
case. That’s why it’s important to diversify your investment dollars among
vehicles that offer varying degrees of risk.
Develop a
Cash-Flow Model
The
other key to meeting your financial goals is basic: you need to spend less than
you earn. To get control of your finances, you need to know how much cash comes
in each month and how much goes out. Track this cash flow for a few months, and
you’ll be able to identify your spending habits. Then, develop a cash-flow
model to guide — and most likely curtail — your future spending. It is wise
to develop a multi-year cash-flow model so that you can identify an anticipated
income plan for future expenditures.