Personal Financial Personal Financial PlanningPlanning

Steps in Creating the PlanSteps in Creating the Plan

Step 1: Identifying GoalsStep 1: Identifying Goals Saving and investing will be more successful if you Saving and investing will be more successful if you

have specific goals in mindhave specific goals in mind It is easier to identify and rank goals if you group It is easier to identify and rank goals if you group

them into short-term and long-term goals. them into short-term and long-term goals. Short-termShort-term goals are those to be reached within a goals are those to be reached within a

year or less. E.g., an emergency fund, buy a new coat.year or less. E.g., an emergency fund, buy a new coat. Long-termLong-term goals are those to be achieved in more goals are those to be achieved in more

than a year, sometimes five or more years. E.g., than a year, sometimes five or more years. E.g., college education, money to start a business. college education, money to start a business.

Short and long-term goals are often related. A short-Short and long-term goals are often related. A short-term goal may be to save $100 a month in order to term goal may be to save $100 a month in order to reach the long-term goal of saving $3,000 for a down reach the long-term goal of saving $3,000 for a down payment on a new car. payment on a new car.

Questions: Questions:

How much will each goal cost? How much will each goal cost? Are some goals more important than Are some goals more important than

others? others? When do you hope to reach each goal? When do you hope to reach each goal? How much money do you need to save How much money do you need to save

each month to reach each goal?each month to reach each goal? Where will you put your savings Where will you put your savings

dollars?dollars?

Step 2: Figuring Net Step 2: Figuring Net WorthWorth

A net worth statement, sometimes called a balance sheet, A net worth statement, sometimes called a balance sheet, is is a comparison of what you own and what you owea comparison of what you own and what you owe. It . It is like a photograph of your financial condition at a specific is like a photograph of your financial condition at a specific time. time.

To figure your net worth, To figure your net worth, list all of the things you own list all of the things you own (assets), then list money owed to others (liabilities). (assets), then list money owed to others (liabilities). Total your assets and your liabilities, then subtract Total your assets and your liabilities, then subtract your total liabilities from your total assets. Do you your total liabilities from your total assets. Do you have a positive or a negative net worth?have a positive or a negative net worth?

Once you are earning a living, you should Once you are earning a living, you should prepare a net prepare a net worth statement once a yearworth statement once a year. This will enable you to . This will enable you to compare your annual net worth statements, and if compare your annual net worth statements, and if necessary, modify your financial behavior or your goals to necessary, modify your financial behavior or your goals to meet your changing financial situation. meet your changing financial situation.

It is not uncommon for young adults to have a negative net It is not uncommon for young adults to have a negative net worth as they incur debts greater than their current income. worth as they incur debts greater than their current income.

Step 3: Estimate Income and Step 3: Estimate Income and ExpensesExpenses

Total all the income you expect to receive Total all the income you expect to receive during the coming year. Begin with regular during the coming year. Begin with regular income such as wages, gifts, allowances, income such as wages, gifts, allowances, interest and dividends. interest and dividends.

Keep careful records for two or three months Keep careful records for two or three months to see where the money goes. to see where the money goes.

Estimate future expenses.Estimate future expenses. Which expenses can be cut back and which Which expenses can be cut back and which

should be increased? should be increased?

Step 4: Review Personal Debt Step 4: Review Personal Debt SituationSituation

No more than 20 percent of a household's take-home pay should No more than 20 percent of a household's take-home pay should be committed to consumer installment and credit card debt. be committed to consumer installment and credit card debt.

When you use credit, it is in your best interest to borrow as little When you use credit, it is in your best interest to borrow as little as possible, seek the lowest finance charge, and pay off the loan as possible, seek the lowest finance charge, and pay off the loan as soon as possible. as soon as possible.

Be Smart About CreditBe Smart About Credit Credit is important because it shows merchants, banks, Credit is important because it shows merchants, banks,

employers and landlords how reliable you are when it comes to employers and landlords how reliable you are when it comes to debt repayment. debt repayment.

A bad credit history can make it tough to buy a house, a new car, A bad credit history can make it tough to buy a house, a new car, or the furniture for a new apartment. or the furniture for a new apartment.

Negative information will likely stay on your credit record for Negative information will likely stay on your credit record for seven years, a bankruptcy for 10 years. For employment and seven years, a bankruptcy for 10 years. For employment and mortgage applications over $75,000, negative information can be mortgage applications over $75,000, negative information can be kept for a lifetime. kept for a lifetime.

Step 5: Allocate Savings to Reach Step 5: Allocate Savings to Reach GoalsGoals

Pay yourself first. Pay yourself first. That is, establish a set amount to save each That is, establish a set amount to save each

payday and put it in savings rather than payday and put it in savings rather than spending the money on current consumption. spending the money on current consumption.

The habit of regular savings for future goals is The habit of regular savings for future goals is a powerful financial tool, even if the amount a powerful financial tool, even if the amount saved each payday is small. saved each payday is small.

Step 6: Balance Income and Step 6: Balance Income and ExpensesExpenses

Compare your total monthly income with the total Compare your total monthly income with the total estimated expenses. estimated expenses.

If expenses exceed income, where are you If expenses exceed income, where are you overspending? Which expenditures can be overspending? Which expenditures can be postponed? How can you increase your income? postponed? How can you increase your income?

If your income exceeds expenses, you can increase If your income exceeds expenses, you can increase savings for goals, satisfy more immediate wants, and savings for goals, satisfy more immediate wants, and increase giving to worthy causes. increase giving to worthy causes.

Step 7: Implement the PlanStep 7: Implement the Plan

Taking action to implement and monitor the Taking action to implement and monitor the financial plan is essential to its success. financial plan is essential to its success.

Step 8: Review and Modify the Step 8: Review and Modify the Financial PlanFinancial Plan

A financial plan is not a static thing – as goals and A financial plan is not a static thing – as goals and circumstances change, your plan should change to circumstances change, your plan should change to reflect this.reflect this.