Guide to Making a Financial Plan
More than just a budget, a financial plan should also include an insurance plan, a savings plan and an investment strategy.
Step 1: List your assets and liabilities.
Your assets include anything of monetary value – bank accounts, investment accounts, Certificates of Deposit (CDs) and Money Market accounts – and property of marketable value, like your home and your vehicles.
Liabilities are anything you owe – your mortgage, your car payment, your credit card bills and any other unpaid bills. Liabilities do not include things like taxes and insurance, which we’ll address below.
Assets minus your liabilities equals your net worth. The aim of a financial plan is to grow or maintain it, depending on your goals.
Step 2: Create a monthly budget.
Start with your monthly income and then subtract all the monthly bills. If you carry credit card balances, take an average of your monthly payments. Estimate an average monthly bill for food. Then add any quarterly, bi-annual and annual expenses like insurance and taxes, as well as any membership dues. Whatever is left over is your discretionary money.
Now it’s time to figure out how you’re spending it? Online Banking is a boon here – most programs let you download your transactions. You may be surprised by how much you spend a month on things like dining out and coffee.
Step 3: Assess your insurance situation.
It may seem dull, but don’t overlook insurance. Nothing will wipe out your finances faster than a catastrophe for which you are not insured. On the flip side, paying for too much insurance, or paying for insurance you don’t need at all, can take a bite out of your cash flow. So how much is enough? A good rule of thumb is: If you or your family would face a severe financial hardship if you lost it, get it insured. This goes for intangibles like your health, your job, and yes, your life, as well as for assets like your car, your house and everything in it.
Step 4: Analyze and adjust.
You now have a clear snapshot of your financial situation: Now the fun begins. A financial planner can be a big help in this process. But here are few questions to get you started.
- Are you saving enough?
Do you have an emergency fund of at least three months salary? If not, make adjustments to your budget to create one. Same for medium-term savings for things like new furniture or a vacation, and long-term savings for retirement or a child’s college tuition.
- What is your debt situation?
Remember, not all debt is bad. But if you are carrying high balances on one or more credit cards, look for ways to pay them off – quickly. If you are a homeowner, tapping into your home’s equity - the portion of your home you own – can be a smart way to use your assets. Consider it for other needs too, like home maintenance or improvement, or a child’s tuition.
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